If someone needs to buy shares or stocks , Exchange traded funds (ETFs) then one needs to have a demat account. This article tries to define in Q & A form about Demat Account.
In India, shares and securities are held electronically in a Dematerialized or Demat account, instead of the investor taking physical possession of certificates. Just like bank which holds the funds for depositors one needs a Depository to hold these shares in electronic format.
A depository is an organisation which holds securities (like shares, debentures, bonds, government securities, mutual fund units etc.) of investors in electronic form. To avail the depository services one needs an intermediary through which investors can avail the depository services i.e store their shares etc in electronic format called as Depository Participant(DP). DPs also provides services related to transactions in securities. In India there are two depositoriesNational Securities Depository Limited (NSDL) and Central Depository Services (India) Limited (CDSL) . While ICICIdirect, HDFCSecurities and independent brokerage firms like Indiabulls, Religare, Reliance, IndiaInfoline and ShareKhan are Depository Participants.
How to Start Stock Investing?
To start investing in the stock markets, you need 3 types of accounts – Trading Account (to place buy/sell orders), Demat Account (to hold your shares in dematerialized form), and a Bank Account (for fund transfers).
Trading Account
An account similar to a bank account, to be opened with a ‘stock exchange registered stock broker’. This account is used for placing orders in the stock exchange (i.e. to buy/sell shares).
Demat Account
An account where shares are held in a dematerialized form (i.e. electronically instead of the investor taking physical possession of certificates). The demat account is necessary to receive/transfer shares when you buy/sell shares through your trading account.
Bank Account
Your regular savings or current bank Account should be linked to your trading account. The Bank account is required to transfer/receive money when you buy/sell shares through your trading account.
Typically, if you sign up with a stock broker, they will guide you on not only the opening of the trading account but also the demat account and linking of your bank account. Just like banks provide you with the facility to open and maintain saving accounts, in the same way the Depositories* provide the facility to open and maintain demat accounts. In India, the government has mandated two entities –National Securities Depository (“NSDL”), and Central Depository Services (India) (“CDSL”) – to be the custodian of dematerialized securities.
Most big stock brokers register themselves as a Depository Participant (“DP”)who act as an agent of the Depositories to make its services available to the investors. Effectively both your trading account and your demat account is maintained by your stock brokers (mostly through setting up of 2 different entities). In case of some stock brokers, they use the depository services of other bigger financial institutions or custodians and only provide the front end trading account. As an investor, no one approach is better than the other for you, as typically, it takes the same amount of time for shares to be deposited and withdrawn from the demat account in either case.
- Approach a BSE and NSE registered stock broker.
- Fill up the KYC form provided by the stock broker.
- Attach the required documents – (i) identity proof and (ii) address proof.
- Produce the original PAN card during account opening.
- For Derivatives segment (i.e. futures and options market), 6 months account statement of your existing bank account is required.
- One cancelled cheque of the bank account you want to link to your trading account.
- 3 passport size photographs
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