How does a Demat Account Work?
Before 1996, the process of investing in equities was considered complex, and rightly so, as you had to visit the stock exchanges for buying and selling securities. The process included verbally shouting the orders among numerous other brokers trying to secure a transaction on the client’s behalf. Several times the orders were miscommunicated and resulted in dummy or false orders. In 1996, the Securities and Exchange Board of India introduced Demat accounts (Dematerialize accounts) in India. The introduction revolutionised and transformed securities trading. Through Demat accounts, the trading in the stock market has become quicker, more secure, efficient, and convenient across the nation.
Now, SEBI has made it mandatory to open a Demat account if an investor wants to invest in any security in the Indian stock market. However, before opening a Demat account, you must know the answer to what is Demat Account and how it works.
What is a Demat Account?
Knowing what is a Demat account is a prerequisite to understanding how does Demat account works. 'Demat' refers to dematerialization, a process by which physical securities are converted into electronic format. Therefore, a trader can use a Demat account to hold, transfer, and transact securities without dealing with physical securities. As a result, trading has become a safer, quicker and much more efficient method of storing securities and executing trades.
Demat accounts are primarily used for investing in shares and securities in an electronic form that is more accessible with a Demat account. Specifically, these accounts are meant to convert share certificates from physical to electronic format, thereby providing greater accessibility for account holders.
With the origination of Demat accounts, investors or traders have observed a substantial reduction in the time required for clearing, elimination of fraud cases, lowered brokerage rates, and an exponential increase in trading volume, especially in the equity market.
How does a Demat Account Work?
How the Demat account works in India is a straightforward process where the account holds the shares in electronic form. Demat accounts are primarily used for investing in shares and securities in an electronic form that is more accessible with a Demat account. Specifically, these accounts are meant to convert share certificates from physical to electronic format, thereby providing greater accessibility for account holders. Every stockbroker levies certain Demat account opening charges for the services rendered and the management of the Demat account throughout its lifetime.
Demat accounts work similarly to how bank accounts function. For a Demat account to perform to its fullest potential, it must be linked with a trading account. Your depository participant forwards your 'buy' order to the stock exchange whenever you buy a company's share via your trading platform. The exchange matches your 'buy' request with another trader or investor's corresponding 'sell' request. Once your order is matched, an order from the stock exchange is sent to a clearance house, settling the trade. Once the transaction has been settled, the number of shares you bought gets credited to your Demat account at the end of the trading day. Simultaneously, the Demat account of the seller is debited for the number of shares that were sold.
Integration of Trading and Savings Accounts
Steps involved in knowing how does Demat account work includes the integration of trading and savings accounts. Without opening a trading account, you would not be able to invest through a Demat account. The trading account is the account that is needed to complete monetary transactions involved in buying and selling securities.
Demat, trading and saving accounts work separately but are interlinked together for smooth trading. It is a prerequisite to link these three accounts before one starts transacting in equity and securities. The foremost step for opening a Demat account is to have a savings bank account. Further on, the Demat account gets credited and holds the purchased securities that are funded by the savings bank account.
It is important to note here that if one wants to sell and buy securities often as a trader, a trading account is vital. Currently, most brokers open a trading account along with a Demat account. You can link both the accounts to the savings bank account and trade in equities, derivatives, mutual funds, commodities, and currencies.
Simple Demat Account Opening Process
Once you know what is a Demat account and how it works, the next step is opening an ideal Demat account. Although there are numerous stockbrokers affiliated with NSDL and CDSL that can open a Demat account for you, choosing the best among them comes with features like low Demat account charges, easy accessibility, investing insights and data analysis. IIFL Securities is among India's highest-rated and leading stockbrokers with over 25 years of financial market experience. It is one of the few stockbrokers registered with the National Securities Depository Limited (NSDL) and Central Depositories Services Limited (CDSL), allowing you to choose between the two as your depository institution.
Here are the steps you must follow to open a Demat account with IIFL:
Step 1: Visit the Website or the Mobile Application
Visit the IIFL Securities website or download the IIFL Markets app from the app store. Click on the ‘Open a Demat account.’
Step 2: OTP and Link
You will receive a one-time password (OTP) on the mobile number. You will also receive a link on your registered email ID. Enter the OTP received on your registered email id. After verifying the OTP, you need to fill out the online Account Opening Form.
Step 3: Fill out the Online Application Form
Fill out the online form for a free Demat account with IIFL Securities. It will require you to submit the above-mentioned essential documents in the account opening format.
Step 4: E-KYC Process
Get your KYC details verified online. The verification of your KYC details is done online after you have submitted the required documents.
Step 5: Receive Demat Account Number
Once the documentation process is completed and the forms are received at HO, the account will be opened within 24 hours. Afterwards, you will receive your Demat account number, and you can start investing.
Investing Insights and Data Analysis
How the Demat account works in India could be made better by selecting a broker that provides you with investing insights and data analysis through its Demat account. You should select a broker or DP that dispenses crucial services of data analytics at a reasonable cost. Ensure that they deliver direct call-to-action requests, timely alerts, real-time valuation, Demat inflow and outflow analytics, portfolio performance analysis, etc. It will allow you to cut costs related to the Demat account and ensure that you make informed investment decisions.
Today, with the dynamics of the financial markets in India, it is important to have a Demat account and a trading account. However, the Demat account you open must be comprehensive in providing you with the best investment features. Hence, you should ensure that you are well-read, aware, and cautious while opening a Demat account to maximise your returns and protect your investments. You can visit the IIFL Securities website or download the IIFL Markets app to open an investor-oriented Demat account that comes with low charges and unique features.
Frequently Asked Questions Expand All
The process of opening a Demat account requires filling out an online account opening form and completing your KYC. For a better understanding, you can look at the detailed process listed above.
The key participants are the potential investor, the stockbroker, and the DP institution such as CDSL or NSDL.
A Depository Participant (DP) is an agent of the depository and is authorised to offer depository services to investors. According to SEBI guidelines, financial institutions, banks, custodians, stockbrokers, etc., can be affiliated to be DPs.
With a Demat account, you can hold a wide variety of investments such as bonds, equity shares, government securities, mutual funds, and exchange-traded funds(ETFs). Similar to a bank account, a Demat account is either credited or debited each time you buy or sell shares of a company. It not only eliminates unnecessary paperwork but also helps streamline the process of share trading.
There are a few maintenance charges associated with opening a Demat account. Read all the documents regarding this fee and register only if the charges are acceptable to you.
Yes, it is necessary to link the bank account with the Demat account by opening a trading account to complete the monetary transactions while investing.