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You are probably familiar with the idea of investing in shares and equities, which give you returns on your investment based on market fluctuations. The first thing you’ll need in order to invest in these shares and equities is a demat account. Over the past few years, you may have seen the term ‘Demat Account’ quite frequently, causing you to wonder what they were all about. Let’s try to answer a few basic questions about demat accounts.
What exactly is a demat account?
Short for dematerialisation account, a demat account is like a bank account, but instead of storing or holding your money, a demat account holds your securities in the form of shares, debentures or bonds. This information is stored in a digital format and acts as an alternative to the physical certificates that were used previously.
According to the rules set by the Stock Exchange Board of India (SEBI), in order to invest or sell securities in the stock market of India, it is mandatory for you to hold a demat account, along with a Depository Participant (DP).
Depositories and Depository Participants
A Depository is an organisation responsible for holding your securities along with facilitating your transactions. These transactions are performed by intermediaries, called Depository Participants (DP), and they act as a bridge between the depositories and the investors. In order to use the services of a depository, you are required to have a DP.
What are the different kinds of Demat accounts?
In order to understand the market and the kinds of trades that are possible within it, we need to have an understanding of the different types of Demat accounts.
Regular Demat Account: A regular demat account is meant for investors that are based in India. A regular demat account is best used when specifically dealing in equity shares. The shares that you buy are stored in the account digitally, and the ones that are sold are removed from the account. There are many depository participants that offer demat accounts, but the charges levied by each may vary.
Repatriable Demat Account: A repatriable demat is ideally meant for non-resident Indians (NRI), still want to invest or take part in the Indian markets in some way. These demat accounts allow for NRIs to invest in the Indian share markets from anywhere in the world. A repatriable demat account will need to be linked with a NRE bank account. Note that you cannot hold both a regular demat account and a repatriable demat account at the same time, since they are meant to cater to two entirely different demographics. With a repatriable demat account, an NRI can transfer up to $1 million out of the country in a calendar year.
Non-repatriable Demat Account: If you are an NRI who wants to partake in the Indian markets but does not want/have any intention to transfer the funds abroad, a non-repatriable demat account is suited for you. However, you must have an NRO linked to this type of demat account.
Trading account vs. demat account
While both trading and demat accounts are required for us to be able to invest and trade in the stock market, there are some differences between them. The main difference between a trading and a demat account is that a demat account is responsible for holding the securities and shares in an electronic format, while a trading account is responsible for providing you with an interface that allows you make trades in the stock market, which is primarily buying and selling of shares and securities. Essentially, a demat account can be said to be a storage space, while a trading account can be defined as a transactional interface.
How do you benefit from having a Demat Account?
A dematerialisation account, or a demat account serves multiple purposes, and brings a lot of benefits for a customer, a few of which are listed below:
- The information about your securities and shares are held and stored securely in an electronic medium
- The transaction charges associated with a demat account are significantly lesser than its physical counterpart because of not having to pay any stamp duties
- Having the data stored in an electronic medium ensures speed and convenience during electronic settlements
- All data being digitally stored also means that paperwork is reduced by a large margin in case of securities being transferred
- The risks of theft, fraud and non delivery, associated with the certificates in case of the physical medium are eliminated
- The largest advantage of having an electronic medium is the ability to make online investments and sell any number of shares according to your convenience. You can even sell one share if that is what you deem necessary.
If you are looking to start your investment journey in the stock market, get a demat account here https://ipo.kfintech.com/ with KFintech.
