There was a time when share market investors had to jostle with each other to place their orders on the exchanges while holding their physical share certificates in their hands. Each time a share was bought or sold, it involved hefty paperwork. To eliminate all such hassles, Demat account system was introduced in 1996.
Today, investors can buy and sell shares within the blink of an eye, and that too, from the comforts of their homes or offices. All this is possible only because of the Demat account. However, as a newbie, you might be having queries about what a Demat account is, what the benefits of a Demat account are, how to open a Demat account, and many more.
This blog aims to answer all such queries, explaining the Demat account meaning, benefits, features, and steps to open a Demat account, among other things.
What is a Demat Account? What is the Use of It?
Demat account stands for Dematerialised account. It is used to store securities such as stocks, bonds, mutual funds, and exchange-traded funds (ETFs) in electronic format. A Demat account eliminates the need for physical share certificates, making trading or investing highly convenient and secure.
As per the Securities and Exchange Board of India (SEBI) guidelines, having a Demat account is mandatory for anyone willing to trade or invest in stocks and/or their derivatives, such as Futures and Options. Several banks and discount stockbrokers allow you to open an online Demat account, the process for which is discussed later in this blog.
What is the Main Function of a Demat Account?
The primary function of a Demat account is to dematerialise the shares, i.e., to convert physical securities into electronic format. A Demat account helps you store your shares and other securities in digital format and conduct transactions through it.
When you place a buy or sell order at a stock exchange, it is processed through your Demat account, where the securities are automatically credited or debited. Hence, the purpose of a Demat account is to eliminate the need to hold physical share certificates and facilitate seamless trading and monitoring of your holdings.
What are the Benefits of a Demat Account?
The Demat account benefits are immense, making it one of the key financial tools in modern days. From safely storing your financial securities to facilitating seamless online trading to acting as collateral for a loan, it can help you in numerous ways. Some primary benefits of Demat account investment are explained below:
Easy Storage of Your Shares
The most obvious advantage of a Demat account is that it helps you store your shares in a hassle-free and secure manner. Investing in shares has gained immense popularity in recent times, and a Demat account is an essential part of the process. Whether you want to invest in promising stocks for the long term or engage in option trading, a Demat account is compulsory. Apart from shares, you can also use your Demat account to store bonds, ETFs, mutual funds, and government securities.
Seamless Transfer of Shares
A Demat account facilitates the real-time transfer of shares from one investor to another while trading online. It works similarly to a savings bank account, which allows you to transfer money from one account to another. When a trade is executed between two parties, the shares are transferred from the seller’s Demat account to the buyer’s Demat account seamlessly.
Safety of Your Financial Securities
Another significant benefit of a Demat account is that it holds your financial securities securely. Physical securities are prone to theft, damage, or misplacement. A Demat account eliminates these risks by holding assets electronically. Moreover, the digital record keeps everything transparent, reducing the chances of fraud.
Eliminates Paperwork and Associated Hassles
Before the introduction of the Demat account, share trading used to be a hassle for investors. They had to jostle with other investors to place orders on the exchanges. And then, they needed to complete hefty paperwork to execute their orders. A Demat account eliminates all such hassles, facilitating seamless online trading from the comforts of your home or office.
Easy Tracking and Monitoring
With the advent of Demat accounts and online trading platforms, managing your investment portfolio has never been easier. You can now access your Demat app anytime and from anywhere to track the performance of your holdings. You can make changes to your portfolio, place After Market Orders (AMOs), and transfer money from your Demat and trading account to a savings account. All you need is a laptop or a smartphone and an active internet connection.
Collateral for a Loan
A Demat account can also help you avail of a loan during a financial contingency. You can pledge the securities stored in it as collateral and take a loan against their cumulative intrinsic value. Several banks and non-banking financial institutions accept these digital assets for providing secured loans.
Income Tax Benefits
Do you know what’s the advantage of adding a Demat account in an income tax account? It helps in accurately maintaining a record of your capital gains, dividends, and other earnings, thus, simplifying the income tax return (ITR) filing process. You can also benefit from long-term capital gains tax exemptions and deductions if you plan your investments strategically.
Delivery Trading
What is delivery trading? It involves purchasing stocks with the intention of holding them for an extended period, making it a long-term investment strategy. To facilitate this, investors need a Demat account, which allows them to securely hold their shares in an electronic format, ensuring easy access for future trading or selling when market conditions are favorable.
How to Open a Demat Account?
Now that you know the uses and benefits of a Demat account, let’s address the question, “How to open a Demat account?” Several banks and stockbrokers allow you to open an online Demat account in just five minutes. Below are the steps for Demat account opening online process
Step 1 – Choose a depository participant (DP) or a stockbroker. It can be a bank, financial institution or a stockbroker offering Demat and trading services.
Step 2 – Fill out an online Demat account opening form on the stockbroker’s mobile trading app or website.
Step 3 – Submit the required documents and complete your e-KYC.
Step 4 – Link your savings bank account with your Demat and trading account.
Step 5 – Start investing once your Demat account is successfully activated.
Conclusion
A Demat account is an indispensable financial tool for anyone looking to trade to invest in the stock markets. From offering security and convenience to providing tax benefits, the advantages are vast. However, it’s crucial to open a Demat account with a SEBI-registered stockbroker offering extensive features and services.
HDFC Sky is one such platform where you can enjoy a gamut of benefits, such as zero account opening charges, daily trade recommendations, and many more.
