A Beginner's Guide to Demat Account & Its Types

Investing in the stock market has been easier and more comfortable over time. Still, a lot of people find it confusing since several kinds of accounts are required in order to buy different kinds of securities. A demat account is one example of this, and it's essential to these transactions.

Demat Account: What Is It & How it Works

A dematerialized account or demat account is a digital repository that can hold several types of investments such as shares, bonds, securities, ETFs, etc in a single place. A demat account is commonly used alongside a trading account and bank account.

For example, if you purchase shares of XYZ company, they will get credited into your demat account; when you sell them, they will be debited from your demat account. The dematerialization process converts physical share certificates into electronic form, making transactions quicker and more efficient. This is basically how demat accounts work.

Who should open a demat account?

A demat account, which essentially acts as a bank account for depositing and keeping shares, is required for anyone wishing to trade or invest in shares, bonds, exchange-traded funds (ETFs), and other tradable assets in India.

Read on to understand the types of demat accounts, their features, and how you can open a demat account.

What are the types of Demat Accounts?

Individuals can choose from a variety of demat accounts depending on their objectives and eligibility. The subsequent criteria are principally used to separate these accounts:

Resident and Non-Resident Demat Accounts:

Resident Demat Accounts: These are accounts for those who are residents of India. They allow seamless investment and trading in the Indian stock market. Among the examples of demat account types, regular demat accounts and basic services demat accounts (BSDA) are the most commonly used.

Non-Resident Demat Accounts: Non-Resident Indians (NRIs) are eligible to open demat accounts under this category. Depending on their requirement to send money overseas, they can select from a variety of demat account types, including Repatriable and Non-Repatriable Demat Accounts.

The benefits of different demat accounts lie in their suitability for different kinds of investors.

The following list includes several typical demat account types.

1. Regular Demat Account

This is the most popular type of demat account offered to all Indian residents who are into trading or investing. It allows individuals to hold a variety of securities in electronic format.

2. Basic Services Demat Account (BSDA)

This is a type of demat account particularly aimed at small investors, with reduced annual maintenance charges (AMC). It's ideal for those with a small portfolio value or someone who is just starting, but the individual must be a resident of India.

3. Repatriable Demat Account

This account is specifically designed for NRIs who wish to invest in the Indian stock market. A repatriable demat account allows you to transfer funds abroad. This is subject to certain conditions and regulatory requirements.

4. Non-Repatriable Demat Account

This is another type of demat account available for NRIs. However, a non-repatriable demat account does not allow the transfer of funds abroad. Investments made through this account must remain in India.

5. Corporate Demat Account

Designed for businesses, corporate demat accounts allow companies to trade and invest in securities. These accounts offer features that cater to the specific needs of corporate entities which could be a private organisation or a public limited organisation.

What are the key benefits of Demat Accounts?

A demat account not only eliminates all the paperwork but also allows you to trade and invest at your convenience from anywhere. Here are some extra benefits of having a demat account:

1. Safety: In online stock trading, there is no hassle of paperwork. Securities held in demat accounts are free from the risks associated with physical certificates, such as theft, loss, and damage.

2. Convenience: Demat accounts streamline the process of buying, selling, and transferring securities as everything is done digitally. It allows swift transfer of shares and saves both time and effort of frequent follow ups.

3. Simple Management: A demat account keeps all your stock market investment protected and accessible in a centralised account. This means easy management of portfolios, and quicker access to your holdings.

Demat Account vs Trading Account: Key difference

A demat account holds your securities, while a trading account is used to buy and sell them. Think of the trading account as your gateway to the stock market, whereas the demat account acts as the storage space for your holdings. Both accounts are essential for seamless trading activities. If you're new to investing, understanding the role of a demat account for beginners is crucial for efficient trading.

How to Open a Demat Account

To open a demat account you need a depository participant. At present, only two depositories in India offer demat account services: The National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited. There is virtually no difference between the two, and both operate under strict SEBI regulations.

Opening a demat account involves choosing a depository participant (DP), submitting the required documents, and completing the verification process. Once the account is activated, you can start trading by linking it to a trading account.

Primary Features of Demat Accounts

Nomination Facility: You can appoint a nominee for your Demat account to ensure smooth transfer of holdings in case of unforeseen events.

Electronic Transfers: Seamless transfer of securities between accounts.

Multiple Access Points: Access your Demat account through online platforms, mobile apps, and offline branches.

Account Statements: Regular statements detailing your holdings and transactions.

Understanding Demat Account Charges:

Similar to a bank account, there are a few charges linked with demat accounts, these include:

Account Opening Charges: The depository participants (DPs) usually take a nominal fee to open new demat accounts. This charge is called the account opening charge.

Annual Maintenance Charges (AMC): This fee is deducted for maintaining the demat account with the depository on an annual basis. This charge is usually waived in Basic Services Demat Accounts.

Transaction Charges: These include the transactional fees for buying and selling securities. Most brokers either charge a flat fee or a percentage-based fee on the total transaction amount.

Conclusion

Demat accounts have revolutionised trading in the stock market by adding safety and convenience for users. Understanding the different types of demat accounts and their features can help you make informed investment decisions. Whether you are a resident Indian, an NRI, or a corporate entity, there is a demat account tailored to your needs. By leveraging the benefits of demat accounts, you can enhance your investment experience and achieve your financial goals.