How to Use of a Demat Account

What is a demat account?

The account that holds records of shares bought and sold by the account holder is known as a Demat Account.  A Demat account is, in general, operated by the account holder. However, Depository participants act as an intermediary in the process. Account holders can put in requests to sell or buy a share which is then forwarded to the stock exchange by the Depository participant.

How to operate a demat account?

The operation of a demat account depends on linking with two other accounts. Demat accounts are required to be linked to a trading account and a bank account. 

1. Trading account & Demat account – Demat accounts only hold records of sold and bought shares. However, actual trading is conducted through a trading account. Hence, it is necessary to link the trading account with a demat account. All of your transactions done through the trading account are recorded in the demat account in the form of electronic copies.

Read : Difference between Demat Account and Trading Account

2. Bank Account and Demat account – All amounts credited and debited during transactions of shares are sourced from the bank account. It is obligatory to link the bank account with trading and demat accounts for successful transactions and records. All amounts credited or debited are reflected in the bank account almost immediately. 

Steps of a demat account's operation

Bank account – Similar to regular banking, all transactions for buying and selling shares are done from the bank account.

Trading account – Since it is not possible to directly buy or sell a share from the bank account, the trading account provides the service of buying and selling shares.

Demat account – The primary use of a demat account is to record the transactions of shares. When a transaction on the trading account is successfully processed, the record of the purchase or sale is recorded electronically in the Demat account.

Activity – It is crucial to conduct occasional transactions of shares to keep the Demat account active. If you don't make any transactions for a long time, your Demat account may be considered inactive.
 

Why is a Demat account necessary?

The Depositories Act of 1996 mandates the use of a demat account for buying and selling shares. Beyond the mandatory aspect, having a Demat account offers important benefits. It ensures safer transactions and transparency, making it worthwhile to go through the short process of opening one.

Security – The major advantage is high security. demat accounts are maintained by the two depositories in India, National Securities Depository Limited and Central Depository Services Limited. The transactions of trading are recorded electronically in the depositories and hence cannot be destroyed. Earlier, there were several risks associated with holding physical certificates, such as bad delivery, fake certificates, delay of delivery, theft, damages, etc. With the introduction of Demat accounts, all risks associated are minimized.

Convenient – Demat accounts not only provide security but also offer convenience. In the past, when people traded shares conventionally, they faced a problem known as 'odd lot.' This meant they had to buy or sell a minimum amount of shares. However, with demat accounts, investors can now buy or sell even a single share, making transactions more flexible and hassle-free.

Time-saving – In today's world, no one has the time to visit a bank for hours frequently. Demat accounts allow investors to trade directly from home. Credit and debit amounts are reflected on the account automatically. Using a demat account cuts down on the hassle of collecting statements from the bank as bank statements are sent directly to the investor.

One stop destination – You can hold various investments like mutual funds, equity shares, bonds, and exchange-traded funds under a single demat account.

Quick monitoring – Demat accounts facilitate easy monitoring of the holdings anytime, anywhere.

Receiving dividends/interest - Dividends, interest, or refunds reach the demat account holder without any delay. A demat account is automatically updated with bonus issues, stock splits, or right issues.

Costs involving Demat account

One of the most important benefits of a Demat account is its minimal cost operation. Operating a Demat account involves a few charges such as Demat opening charge, Custodian fee, Annual Maintenance Cost (AMC), and Demat account transaction charges. 

Demat opening charge –  Currently, demat opening changes can be minimal or nil depending on the DP. Online discount brokers such as 5paisa offer legitimate demat accounts at zero opening charges.

Custodian fee – Custodian fees are charges associated with the safekeeping and management of financial assets in a demat account. Many Depository Participants (DPs) pay these fees as one-time charges to the depository, while some may pass on monthly fees to investors based on the number of securities held. Typically ranging from Rs 0.5 to Rs 1 per International Securities Identification Number (ISIN), these fees may only apply to debits, DPs generally don't charge custodian fees for ISINs of companies that have already paid one-time charges to the depository. Additionally, most DPs nowadays only charge for debits from demat accounts, not for credits.

Annual Maintenance Cost (AMC) – As reported by Moneycontrol, annual charges are in general paid in advance and may range from rupees 300 to 900 per annum. AMC charges vary depending on the Depository participant.A Demat account holder has to pay an Annual Maintenance Charge (AMC) to their Depository Participant (DP) for services. Also called folio maintenance charges, these are usually paid in advance and range from Rs 300 to 900 per year. Some DPs may charge quarterly or lifetime fees of Rs. 2000 and above. Many DPs waive the AMC for the first year, starting billing from the second year.

Demat account transaction charges – When you buy or sell shares, they're added or deducted from your demat account. Some depository participants charge transaction fees, either per transaction or monthly, based on your trading volume.