We all know that that by investing in stocks one can beat inflation, grow savings and create wealth. But you might be wondering how to get started in this. What type of accounts will you need and how to get one? Here in this article, we will introduce you to what is Demat account and various types of other accounts one needs to invest in or trade in the stock market. Also, how can you get them? So, let’s dive in:
What is a demat account?
Your savings account holds your money but it is not capable of holding anything else like a share of a company. This is when Demat account comes into the play. Demat account stands for DE-MATERIALIZED ACCOUNT and it holds shares and other financial securities in it. It stores everything in digital format. So now if you buy shares of a stock, it gets debited from the demat account of the person or institution who sold it to you and gets credited into your demat account. Though it doesn’t happen instantly like real time money transfer. It takes T+2(Trade Day plus two days) days’ time for the shares to finally settle in your demat account. This is the settlement cycle.
A Share represents part ownership in the company, of course to the extent of percentage of shares you own. Hence when you own some shares in a company you must have some papers verifying your ownership. This is exactly what used to happen in earlier days. When someone bought shares in a company, they were given a physical share certificate. But as you might imagine it was a very tiring and tedious task. Things changed with advent of computer and internet. Now there is no physical share certificate being issued. Share certificate is now converted to digital format. Converting a paper format share certificate into digital format certificate is called “Dematerialization”. Hence the abbreviated name demat.
Types of Demat account?
In India there are mainly three types of demat account offered by Depository Participants. They are: –
This is for Indian citizens who reside in the country. This is the most common type and is for folks like you and me.
This kind is for non-resident Indians (NRIs), which enables money to be transferred abroad. Also, this type of Account needs to be linked to a NRE bank account.
This is also for the NRIs, but with this type, fund transfer abroad is not possible. However, it has to be linked to an NRO bank account.
Benefits of a Demat Account
There are several benefits of opening a Demat Account. Some of them are as follows:
Ease of storage: –
In a demat Account you can store as many shares as you need to. In this way, you can trade in volumes and keep track of the shares in your account. You can also rely on your it to execute quick and safe transfer of shares.
Variety of Instruments: –
A demat account has the capability of holding several types of instruments. Apart from stock market shares, you can also use your it to hold multiple assets like mutual funds, Exchange Traded Funds (ETFs), government securities, etc.
Easy to access: –
Accessing your account is very easy. You can do so with the help of a smartphone or laptop and manage your investments from anywhere, anytime.
No paper certificates: –
It is easy and convenient to store digital certificates. It is also safe from damage and theft.
Where to open a Demat account?
Like banks give you a savings account, a Depository provides you with a Demat account. In India there are two depositaries. The National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited (CDSL). Both are virtually the same and work under strict regulations of Sebi. But you can’t walk directly into one of the depositories and ask for an account. To open a demat account you have to contact a Depository Participant (DP). A DP acts like an agent between you and the Depository. Even the DP has to follow all rules and the regulations laid out by the SEBI. According to SEBI guidelines, financial institutions, banks, custodians, stockbrokers, etc. are eligible to act as DPs.
Hence to open a demat account you can choose a stockbroker of your choice and they will help you open a account with one of the depositories they are registered with. Some of India’s leading stockbrokers are Zerodha, Fyers, Paytm Money and Upstox.
How to open a Demat account?
With the online method today opening a demat account is fairly simple. Decide the stockbroker with which you would like to open a stock with. Go to the stockbroker’s website or app and follow the steps of account opening. Depending on the guidelines of Sebi and requirements of the stockbrokers, there is a list of few basic documents needed to open such an account, including personal details and bank/income details. Submit the required documents and you’re done. It typically takes 5 – 15 mins to complete the process. It would take about 1-2 days depending on your stockbroker to complete the verification.
Other types of account
In order to trade or invest in the stock market a demat is not sufficient. There are two other types of accounts one should have. They are mentioned below –
1.Bank Account –
The account offered to you by your bank is linked with the trading account which the stockbroker will offer you. You will transfer money from it and into it from your trading account.
2.Trading Account –
A trading account is an account which your stockbroker offers you. It is probably the most important one as it remains at the center of the other two accounts. It is also the one with which you would be interacting always. A trading account is interlinked with both a demat account and a bank account.
Hence the crux of the story is you need to choose a stockbroker of your choice based on various parameters. And your stockbroker will provide you with a trading account and a demat account which would be automatically interlinked. You need to have a bank account so that it can be linked to your trading account. Though some stockbrokers also offer a 3 in 1 account which essentially contains all three accounts namely trading account, a demat account and a bank account.
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