As per the directives of the Securities and Exchange Board of India (SEBI), traders and investors are allowed to trade in securities only if the securities are held in a dematerialised form. Demat account (also known as a dematerialised account) is an account where the shares and securities are held in an electronic form. It holds an individual’s investments in the form of shares, mutual funds, government securities, bonds and exchange traded funds in one common place.
A Demat account is similar to a bank account where you hold your money. In the Demat account, you hold your shares and securities in an electronic form. Just like a bank account, you can have a Demat account with no balance of shares and also have zero balance in your account.
What is Dematerialization and How Demat Account Works?
Dematerialization is essentially the process of converting physical shares into electronic form. At the time of online trading, the shares that are bought are held in the Demat account which further simplifies the process of trading in securities for the users.
In India, Demat account service is offered by share depositories like NSDL and CDSL with the help of depository participants, intermediaries and stock brokers. When you open a Demat account, you are assigned a unique identification number that has to be used for all the transactions entered by you. In order to trade, you have to deposit funds in your Demat account which will help you place an order for a stock. Once your order is executed, the shares will be transferred to your Demat account with the help of the unique identification number.
After understanding what is a Demat account, let us now understand why should you have a Demat account?
Reasons to Have a Demat Account
Holding securities in physical form is a tedious process as it involves a lot of paperwork and you always run a risk of holding fake shares. In order to do away with this and to facilitate easy and seamless trading and investing experience, it is important to have a Demat account. In fact, it is mandatory to hold shares and securities in the Demat account. However, SEBI allows to trade up to 500 shares in physical format but it is not a convenient option.
Moreover, holding securities in demat account eliminates the risk of theft, forgery, damage or non-delivery. It also reduces the cost of holding the securities as it attracts lower annual maintenance fee and transaction cost as compared to holding physical securities. It not only offers safety but also offers great liquidity of the securities that you hold in your portfolio. You can even pledge the securities in your demat account.
How to Open a Demat Account?
You can open a demat account with any depository participant like a bank or a stock broker like Kotak Securities. For account opening, you need to fill in the account opening form and submit various documents like copy of Aadhaar card, PAN, other address proof (such as voter id, driving license, ration card, etc.), KYC form, crossed cheque and bank statements.
The Bottom Line
Now that you know what is a Demat account, you can invest in stock market and mutual funds and not be aloof from all the investment opportunities these investment avenues have to offer.
In order to trade in the stock market, you need funds and for that, it is very important that you have enough savings. Also, another tool that is recemmonded in your inventory before you start investing is an insurance plan. You can satiate both these needs by browsing through various savings plan by Kotak Life such as Kotak Guaranteed Savings Plan which enables you to accumulate wealth and strengthens your finances for the future.