Demat account: Electronic storage for securities

What is a demat account?

A demat account, short for "dematerialised account," is a digital storage space for your investments. Instead of getting physical share certificates that you need to keep safe, everything is stored electronically. It functions like a digital locker for your investments.

Think of it like how we've shifted from carrying physical photographs to storing digital images on our phones. Demat accounts do the same thing for your shares and investments.

When were demat accounts introduced?

Demat accounts were established in India in 1996, initially for National Stock Exchange (NSE) transactions. The system operates through these main components:

• Depositories: These are organisations like NSDL (National Securities Depository Limited, established 1996) and CDSL (Central Depository Services Limited, established 1999) that hold all securities in electronic form. They maintain accurate records, handle account transfers, update corporate actions like dividends and bonus issues, and ensure the overall integrity of the demat system.
  
• Depository Participants (DPs): These are your point of contact for demat services, typically including banks, brokers (like Zerodha), and other financial institutions. You interact with DPs to open your demat account, update your information, resolve account issues, process transactions, and handle share transfers. DPs connect you to the depositories.
  
• Regulatory body: SEBI (Securities and Exchange Board of India) ensures proper operation by regulating the Indian securities market to protect investor interests and promote fair trading practices. It oversees various market participants, such as stock exchanges, brokers, and listed companies, ensuring compliance with regulations and guidelines.
  

How do demat accounts work?

A demat account works similarly to a bank account, except it holds investments instead of money:

1. When you buy shares, they get added (credited) to your demat account.
2. When you sell shares, they get removed (debited) from your demat account.

Your demat account is linked to your trading account (for buying/selling) and your bank account (for payments).

Benefits of a demat account

Digital security and convenience

• No more paper certificates: You no longer have to worry about damaged, lost, or stolen physical share certificates.
• Simple paperwork: When buying or selling securities, you don't need to fill out transfer forms or stamp papers.
• Check anytime: You can view your investments instantly on your phone or computer, 24/7.

Investment flexibility

• Keep everything in one place: You can store different types of investments (shares, bonds, mutual funds, etc.) in a single account.
• Quick transactions: You can buy or sell investments much faster than with physical certificates.
• Use investments as security: You can use your shares as security to get loans when needed.

Hassle-free payouts

• Direct deposits: Your dividends and refunds go straight to your linked bank account.
• No missed opportunities: Your company benefits, like bonus shares or splits, are automatically updated.

Simple ownership transfers

• Easy transfers: You can send shares to family members without complicated paperwork.
• Quick gifting: You can gift shares to others directly through your demat account.

Common questions about demat accounts

Do I need a demat account?

Yes, if you want to invest in the stock market. Since March 31, 2019, SEBI has made it mandatory to have a demat account for buying or selling shares on any stock exchange in India.

Do I need a lot of money to open a demat account?

No. This is a common myth. You don't need any minimum balance to open a demat account. You can start investing with whatever amount you're comfortable with, even if it's small.

What is a Basic Services Demat Account (BSDA)?

SEBI introduced the Basic Services Demat Account (BSDA) in 2012 to make investing more affordable for retail investors. According to the latest SEBI rules, from September 1, 2024, your demat account will automatically become a BSDA if:

• You have only one demat account linked to your PAN across all brokers.
• The total value of your investments in the account is less than ₹10,00,000.

The maintenance charges for a BSDA depend on how much your investments are worth:

This is a positive change from the older rules (before September 1, 2024), which had lower limits of ₹50,000 for free accounts and ₹2,00,000 for reduced-fee accounts.

How are demat and trading accounts different from each other?

• Demat account: A demat account is where your securities, such as stocks, bonds, mutual funds, and ETFS, are held electronically. It acts as a digital locker for your investments after you purchase them.
• Trading account: A trading account is used to place buy and sell orders in the stock market. It serves as the interface that enables you to execute transactions, connecting your bank account with your demat account.

You need both accounts, and they work together to complete the investment process. Your trading account lets you place orders in the market, while your demat account holds the securities you've purchased. Both accounts need to be linked to your bank account for fund transfers.

Can I only keep shares in my demat account?

Your demat account can hold many different types of investments:

• Stocks
• Mutual funds
• Bonds
• Government securities
• Exchange Traded Funds (ETFs)
• Various other investment instruments

How to open a demat account

Opening a demat account is straightforward. If you're interested in beginning your investment journey, you can open a Zerodha demat account for free. Visit signup.zerodha.com and follow the instructions. You'll need your mobile number linked to your Aadhaar for verification. If your mobile number is not linked to your Aadhaar, you can follow the offline account opening process.

Once your account is set up, you can begin investing in the stock market right away.