A Demat account is one that allows you to buy, sell as well as transact in shares without the need of any physical paperwork.
If one has to save money or make cheque payments, then he/she needs to open a bank account. Similarly, one needs to open a Demat account if he/she wants to buy or sell stocks.
Thus, Demat account is similar to a bank account where in the actual money is being replaced by shares. In order to open a Demat account, one needs to approach the Depository Participants [DPs]
In India, a Demat account is a type of banking account that dematerializes paper-based physical stock shares.
The Demat account is used to avoid holding of physical shares: the shares are bought as well as sold through a stock broker. In this case, the advantage is that one does not need any physical evidence for possessing these shares. All the things are taken care of by the DP.
Steps involved in Dematerializing existing physical shares
- Fill the Demat request form or DRF ( this can be obtained from a depository participant)
- Deface the share certificate/s which you want to dematerialize by writing across surrendered for dematerialization
- Submit the DRF & share certificate/s to the DP
DP would then forward them to the issuer or their R&T Agent Subsequent to dematerialization, your depository account with DP, would be credited with the dematerialized securities.
Benefits of Demat
- A safe, secure and convenient way for holding securities;
- Immediate transfer of securities;
- No stamp duty on the transfer of securities;
- Elimination of risks that are associated with physical certificates like bad delivery, fake securities, thefts, delays, etc.;
- Reduction in paperwork;
- Reduction in transaction cost;
- No odd lot problem (even one share can be sold);
- Nomination facility;
- Change in address recorded with DP gets registered with all companies in which investor holds securities electronically;
- The transfer of securities is done by DP eliminating correspondence with companies;
- Automatic credit into DeMat account of shares, resulting from bonus/split/consolidation/merger etc.
- Facility of holding investments in equity as well as debt instruments in a single account.
Required documents for a Demat Account
The documentation required to open a demat account depend upon to your relationship with the institution. The DPs also ask for a DP-client agreement to be made on a non-judicial stamp paper. Following is a broad list of documents required:
- Application form
- A cancelled check, preferably MICR Proof of Identification
- Proof of Address
- PAN card (mandatory)
- Recent photographs (one or more)
In the application form there is a sheet in which your broker or sub-broker will mention the brokerage percentage. The brokerage varies from 0.10% to 0.75%. If you plan to trade frequently you may negotiate with your broker/sub-broker on the brokerage percentage.