As a prospective investor looking to enter the stock market, you may be wondering about the possible steps that need to be taken before getting started. The first step in doing so will be opening a Demat account.
It can be quite difficult to choose the right type of Demat account as there are many Depository Participants (DPs) to choose from, each with their own features and trading accounts. Look no further, and learn how to select the best Demat account in India!
What is a Demat account?
A Demat or dematerialisation account is considered to be a prerequisite for you to make stock investments. It is an account used to store your securities and shares in an electronic format. The shares/securities stored here make trading them much easier for you during online trade sessions.
Depositories like Central Depository Services Limited (CDSL) and National Securities Depository Limited (NSDL) offer demat account services in India. Similarly, intermediaries such as stockbrokers or depository participants can be employed by you to facilitate these services.
Here, all intermediaries may feature Demat account charges that vary according to the volume of securities held in your account, and the type of subscription. It could also depend on the agreed terms and conditions between you and a stockbroker.
Why are Demat accounts important?
Utilising Demat accounts can help reduce the risks of loss, forgery, theft, and damage to physical certificates. It is a convenient and secure way of storing securities that can also allow you to transfer shares from one Demat to another at a moment’s notice.
In the case of mergers and stock bonuses, among others, shares are transferred to your account. This has also made it much easier to handle stocks as Indian exchanges are now adhering to the T+2 settlement cycle, as enabled by Demat accounts.
Information regarding your account can easily be viewed online by logging into your account on the website.
Types of Demat accounts
When looking for the ideal Demat account for you, it is crucial to remember the chosen categories of these, as certain ones can be more suitable for diverse investors. Here are the different types of Demat accounts that are available to you:
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Regular Demat Account
Indian residents looking to trade only in shares and require storage for their securities can opt for the regular Demat account. Here, stocks are debited from your Demat account after selling them and credited on any purchases made.
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Basic Services Demat Account
This new account type has been brought about by SEBI and does not have any maintenance charges if the holding value is under ₹50,000. This is ideal for investors that have not created a Demat account yet.
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Repatriable Demat Account
NRI Indian investors can open a repatriable account to shift their earnings in the Indian market to abroad. If you are looking to open such an account, you will be required to close your regular Demat account in the country and open an external NRI account to get payments.
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Non-repatriable Account
It is similar to a repatriable account and is applicable for NRIs, but does not allow the transfer of funds to the resident location.
Things to consider before opening a Demat account
There are a lot of factors that need to be taken into account before opening a Demat account. You are dealing with securities and shares, which is a major financial decision that is undertaken by you. It is especially important as your investments are to be held in electronic format.
Here are some things you must know about before creating a Demat account:
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Understanding the process of opening a Demat account
While opening a Demat account, you must be well-versed in the process of creating one. A Depository Participant (DP) must first be identified as per your convenience and the agreed terms, following which the account opening formalities must be undertaken.
This includes aspects like submission of identity proof, residence proof, and broker agreement signing, among others.
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Learn about the costs of running a Demat account
Like most other accounts, managing a Demat one comes with significant costs. Aside from the one-time account opening charges, account maintenance charges are levied each year. Payments for all debits also must be made frequently. Also, charges for Dematerialisation Request Form (DRF) and Delivery Instruction Slip (DIS) rejection will be incurred.
If you are looking to save on such costs, opting for a Basic Services Demat account can be ideal.
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Know about nomination, transmission, and transfer
While dealing with securities and shares in a Demat account, nominating a successor of your account, either your family members or others, is vital. This transfer can be done voluntarily, and SEBI permits an off-market shares transfer from one Demat account to another. However, there are no capital gains made on transferring investments to relatives.
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Choosing the right Depository Participant (DP)
Ideally, opting for a DP that is not only well-versed in the stock market but is also passionate about its service standards is preferable. Conducting thorough background research before selecting a DP will likely facilitate better chances of finding the right one.
In all, creating a Demat account may seem tricky, but is well-equipped with the right facts and details regarding your choices in DPs, account types, and more, and can yield better results.
Interesting Related Article: “Corporate Demat Account Opening Documents“