A demat account is your ticket to trading in the stock market. A demat account is your bank account for shares and other securities. India shifted out of physical share certificates in 1997 and entered the demat era. Since then there has been a tremendous growth in the total number of demat accounts and the quantum and volumes of trading in the Indian markets. More than 99% of the outstanding shares have already been dematerialized and 100% of the all the trades and settlements in the stock markets happen only through the demat mode. Let us start with how to open a demat account.
How to open a demat account?
Your decision to open a demat account starts with your intent to hold your shares in demat and participate in the stock markets. Nowadays, when you open a trading account with a broker, the demat account is opened along with that. The idea is that SEBI regulations require you to open a demat account with a registered DP before you can trade in the cash market. The documentation is the same for trading and demats, although you need to execute separate agreements with the DP for the two accounts. Here is the 5 step process flow:
- The first step is to decide on your DP. Normally, when you open a trading account, the trading account and DP account are with the same entity for simplicity. The list of DPs is available in the websites of depositories: CDSL (Central Depository Services (India) Ltd and NSDL (National Securities Depository Ltd). NSDL and CDSL are the two principal depositories and there are hundreds of depository participants (DPs) where you can open and operate your account.
- The next step is documentation. This is an elaborate procedure and you need to ensure that all photocopies of the documents are self-attested and you need to carry along the originals for verification.
- The third step to opening your account is to submit your proofs of residence and your proofs of identity. The DP accepts government issued ID cards with photograph as proof of identity and includes passport, Aadhar Card, driving license, voter identity card, pension card etc. For proof of residence, the DP will accept one of the above documents with latest address or may insist on additional proof in the form of rent agreement, sale deed, electricity bill or landline bill. PAN card is a must and has to be submitted apart from the other documents.
- You will have to sign an agreement with DP in the depository prescribed standard format, which gives details of rights and duties of investor and DP. You are entitled to receive a copy of the agreement and schedule of charges for future reference.
- The DP then opens your account after verifying all the details will allot the demat account
- number. This is also called beneficial owner identification number (BO ID). All your purchases / investments in securities will be credited to this account. If you sell your securities, your demat account will be debited. When you apply for an IPO, you will have to mention the combination of your DP id and your BO id.
A few points about operating your demat account
There is no limit on the number of demat accounts that you can have. You can have multiple demat accounts although you must factor in the additional costs and the challenges of multiple demat accounts. The first thing is to ensure that your bank account is mapped to the DP account. This will make it much safer as any credits will go automatically only to your specified bank account. Nowadays, internet trading is the in-thing and normally your demat account, trading and bank account are linked to each other in a single seamless chain.
For regular credits to your DP account, you can either choose to sign a receipt-in slip each time or you can opt for a standing instruction wherein the credits to your demat account will come automatically without the RI slip each time. This option is part of the application form. When you sell shares you are required to sign a debit instruction slip (DIS) mentioning each share that you are selling. In online trading, you can choose to give a power of attorney (POA) to your broker which makes demat selling much simpler.
Finally, there are some administrative issues to take care off. Normally, your DP debits annual AMC charges to your bank account. Ensure that your bank account is adequately funded. When you sell shares in online trading or offline trading, first check that you have adequate balance to avoid the embarrassment auctions later on. Keep a solid audit trail of your transactions. When you sell shares ensure that shares are debited on T+1 date and when you buy shares ensure that you get the credit in your demat account on T+2 date. Above all, make it a point to regularly download your demat statement and reconcile with your trading ledger. These basic checks and balances can go a long way in making your demat experience a lot richer.