Prior to 1996 in India, shares were bought, stored and sold as share certificates. With the setting up of National Securities Depository Limited in India, share trading became online, and shares were now traded in an electronic or dematerialized format. A demat account allows investors to buy, store and sell shares in their dematerialized form. Just like a bank account is for your money, demat account is for your stocks and other equity-related investments.
With the diversification of investment options, a demat account can store mutual funds, bonds, government securities, Exchange Traded Funds (ETF), etc.
As per the Securities and Exchange Board of India, opening a Demat account is necessary if you want to buy, store and sell shares. A demat account makes investing in stocks a safe and streamlined experience. As the share certificates get converted to electronic format, it increases their accessibility and ease of handling.
Let us first see how a demat account can be opened. You need a Depository Participant, who is authorized to buy and sell financial securities with a Central Depository. There are two central depositories in India – the National Securities Depository Limited (NSDL), promoted by the National Stock Exchange (NSE), and the Central Depositories Services Limited (CDSL), promoted by the Bombay Stock Exchange (BSE). The Depository Participant needs to be registered with the Securities and Exchange Board of India (SEBI) and follow the essential rules and regulations.
When you find the appropriate Depository Participant, you need to fill an account opening form along with your PAN Card(compulsory), Proof of Identity, Proof of Address, Proof of Income, Bank account details, and other relevant documents. Once the documentation process is complete, the DP opens a Demat account for you, either with the NSDL or the CDSL and provides you with a Unique Client ID and a Demat Account number. You also require online trading platforms to buy and sell shares through the stock market. The DP will also provide you with the login credentials of these platforms. The Depository Participant, now as the investment broker, will purchase the electronic or dematerialized shares for you and maintain them in your Demat account. You can view them in the Statement of Holdings. If you have chosen an online platform, the holdings can be viewed online. Generally, the shares are credited by the Depository Participant on a T 2 basis, i.e., Trading Day 2 days.
If you wish to sell the shares, a delivery note with detailed information regarding the stock to be sold has to be given to the Depository Participant (DP). The DP will sell the respective shares, and the money will be credited to you. If you are using an online platform, the debit of shares and the credit of money are immediately visible in the account.
When the listed companies give out dividends or bonus, they get a list of their shareholders from the NSDL or the CDSL and thus credit the investor accounts.
To ensure productive and profitable trading for the investor, the Depository Participant creates and manages a unique investment portfolio for every investor. The variety of holdings in a portfolio, determine the diversification of a portfolio. You need to understand and communicate your specific objectives, income, and the risk-security ratio. These will help the Depository Participant determine the diversity or type of holdings in your portfolio. Understanding, discussing and then organizing the holdings for a portfolio is known as portfolio management.
If you are an investor, who is just starting out with his investments, with a long term goal, you can afford an affinity towards a more “high risk, high returns” portfolio. However, if you are an investor nearing his retirement or someone with a low unsteady income prefer a “low risk, steady return” portfolio.
1.Dematerialized –
Equity shares can be bought, held and sold digitally in electronic format through a demat account. This electronic format of shares is known as dematerialized shares.
2.Depository Participant -Depository Participants (DP) are authorized links between the Depositories and investors. It can be a bank or a brokerage firm or any financial institution which is registered with the SEBI as a facilitator of trade in equity investments and can trade securities through the Central depositories.
3.Central Depository - A depository is a central entity where the stocks, shares and other financial securities are stored in an electronic or dematerialized format. It facilitates buying and selling of securities online for investors while maintaining comprehensive data of the holdings and ownership records.
There are two Central Depositories in India– the Central Depositories Services Limited (CDSL) and the National Securities Depositories Limited (NSDL), promoted by the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE).
4.Unique client ID and Demat Account number – Every demat account number contains 16 digits, and is a combination of the DP ID investor’s client ID. The client ID is unique to every investor and identifies their specific portfolio. The first 8 digits are the DP ID, which is the unique identification number provided to the Depository Participant by the Central Depository. The next 8 digits are the investor’s client ID.
5.Portfolio - A portfolio is a collection of different investment instruments as well as the combination of specific types of shares, created by a DP and is unique to every client.
6.Holdings – The individual investment instruments of a portfolio are known as holdings. The variety of holdings in a portfolio, determine the diversification of a portfolio.
7.Portfolio Management -Understanding, discussing and then organizing the holdings for a portfolio is known as portfolio management. Portfolio management is an art of creating a portfolio with the correct holding allocation based upon the investor objectives, balancing the risk and performance.
8.Nomination Facility- An investor can make a provision regarding the ownership of shares after his death. A nomination form allows an investor to appoint any person as the nominee to their demat account, and if the account holder dies the holdings are transferred in the name of the nominee.
9.Power of Attorney-An investor can appoint a Power of Attorney to his account. A Power of Attorney authorizes the appointed person to operate the account on the account holder’s behalf.
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