Imagine having to call your broker to sell your share, then post/courier physical share certificates and again if the shares don’t reach on time you have to pay a ‘Badla’. Then wait for the cheque to arrive. This was more or less how share trading was happening before online demat accounts were introduced.
Thank God we are not in that age anymore. Click your mouse, sell and get cash in your bank account. So cool right?. Trading of shares and securities in India now take place electronically in a Dematerialized or Demat Account.For the benefit of beginner investors let us see how to open online demat trading account in India.
How to open Online demat and trading account in India
A demat account helps you to maintain shares in electronic form. This has made online trading very convenient.With the help of the demat and trading account, you can begin trading online and avoid taking control of the physical ownership of the certificates.
Just remember that though demat account and trading account are often mentioned together they are actually separate account serving different purposes. In simple words, demat account is like a holding account where shares are added or reduced when you carry out corresponding buy/sell transaction. A trading account helps you to carry out these buy/sell transaction.
Holding the certificates in the electronic format helps in smooth transactions and gives a greater control of the trading. Unlike the traditional form, the Demat Account can act as a single platform for storing all your investments such as stocks, Gold ETF and IPO.
As the trading takes places online(with help of trading account), you will receive the ownership of the stocks and securities instantly. In addition, you will be in a secured position, as you are not required to worry about the loss of the certificates.
Before beginning the process, you have to register with an investment broker or company (More details given later). Quoting the account number is crucial for every transaction and settlements. Every shareholder and investor has a Demat Account and performs all the transactions online or through calling a broker.
Gaining access to an online account requires username and password. Once you register and have the login details, you can begin the trading and initiate the process of sales, purchases and settlements. The transactions are complete as soon as you confirm a valid order .
Advantages of online demat account
The primary benefit of the Demat Account is the instant transfer of bonds, shares, and securities. Crediting takes place as soon as you complete the purchase. You will also transfer and settle an issue instantly over the Internet.
The online operation gives you the flexibility to perform actions from anywhere. Additionally, the online security prevents the loss of the certificates due to fire, theft or mutilation, which are major causes of concern when you hold physical certificates. trust me, there are numerous investors who lost considerable wealth due to these issues in earlier days.
The transaction charges with opening a demat account and operating it depends on the investment company and is always typically lower than the physical format. You will further avoid forgery and damage to the certificates when you carry out the transactions online.
As a Demat Account holder, you are eligible for stamp duty exemption and hassle of filling up the transfer deeds. As the certificates are in electronic format, you avoid the stamp duty due to the reduced transaction cost. The advantages of the Demat Account make it simple and stress-free atmosphere for you to carry out trading in India.
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Why online demat account was introduced
Introduction of the Demat account system in India helped in reducing the risks associated with the paper certificates. The introduction of the system under the Depository Act of 1996 helped ease the process of sales, purchase, transfer of ownership and rights.
It also benefits the company because they reduce the cost of operation and avoid overhead capital in terms of paper purchase, printing expenses, postage stamp, and storage.
The Demat Account is similar to a bank account. However, the Demat holds shares, mutual funds, and ETFs. You need the account to enter the stock market and begin trading. Further, the Income tax department can also have transparent access to your trading activities, if needed.
How demat account works
In India, NSDL and CDSL are the two primary depositories. They possess the database of all Demat Accounts. These two prominent players hold the shares that you purchase or sell, similar to banks that hold your amount.
The unique ID assigned to you is essential for every transaction that you perform through the account. The number acts as your recognition, which is necessary to complete the process of transferring the purchased shares to the account.
You cannot access the primary DPs directly. It is here that Depositor Participants or DPs come into action. They are the mediators between the DP and investors. HDFC Securites, ICICI Direct , ShareKhan, Indiabulls Securities are examples of Depository Participants.
These participants can be anyone who is registered with SEBI and holds a valid licence. It can be a banking organization, financial institution or a broker. However, these agencies require permission to operate their services and have the power to carry out other Demat services.
The Depository Participant manages your portfolio. The portfolio contains all the details related to the transactions and other details. Every time you login to your account, you will view the updated statement in relation to your account. The update is automatic and appears almost instantly in the account each time you perform a transaction.
Learn more on how demat works in Wikipedia article here
Steps in Opening Demat Account in India
In order to open Demat Account in India, you have to approach a registered Depository Participant (DP). A DP acts as an intermediate between the investor and the depository. Technically, they are brokers and help the depositories by making the services available to the investors across the country.
As of 2006, there are 535 registered depositories in the country. A DP typically exists of financial organizations, banks, trading companies and investment brokers.
It is feasible to open Demat Account online by visiting the website of the investment company. For example, if you choose ICICI Bank as the broker, you have to visit the website and fill the online application form. Upon finishing the application, you have to take a printout and attach identity proof, residence proof and PAN card xerox copies.
ii)You have to visit the nearest branch and verify the documents in person. Ensure that you paste a recent passport size photograph. The application format consists of rules and regulations, the terms of the agreement and the fees that you will incur.
If it is hard to visit the branch of the bank or the investment company, attest the documents with a notary officer and post them along with the application form. The concerned person begins with the verification procedure, upon receiving the documents.
An authorized person from the DP will inquire into the details furnished in the application form. The person will also make a call to identify the contact details. As soon as the request process is complete, the depository participant provides the account number and client ID. These features help you access the Demat Account online irrespective of your location.
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What happens after Demat Account is opened?
Now that you possess the Demat Account, you will have to pay fees towards the annual maintenance charge for account maintenance. You also ought to pay the transaction fee on a monthly basis towards the securities debited and credited to the account.
The costs of the transaction carried out every month changes from one provider to another. A few DPs charge a flat rate for any transaction. Others charge a fee based on the transaction value. It also depends on the minimum amount of the transaction.
You will pay additional fees towards the conversion of shares to the electronic form physical certificates. The benefit of the account is the non-availability of minimum balance. There is no compulsion to maintain a minimum balance.
You must also note that to open the online demat account , you’re required to submit a Power of Attorney document. The broker requires permission to sell shares from your Demat Account.However you must take care to give a Specific Power Of Attorney that authorizes them to carry only specific tasks like selling/debiting stocks from your demat account and must be done based on your instruction.
It is possible only when you give authorization to the DP. However, the scenario is different if you choose the offline account. For this reason, DPs ask you to submit the power of attorney when you choose online Demat Account. For an offline demat account, there is no PoA needed.
Documents required for opening Demat Account
Along with the application, you have to submit a few documents that confirm your identity, residence, nationality and PAN details. If you visit the branch in person, you may require the originals along with a set of photocopy if the necessary documents to complete the verification instantly.
List of documents:
- Proof of identity: Passport, Voter ID card, Aadhaar Card, IT returns, PAN card, ID cards issued by Central/State government’s with a photo on the card, telephone bill and electricity bill.
- Proof of address: Passport, Ration card, Aadhaar card, Driving license, Electricity Bill, Bank passbook, Telephone bill, ID card/document issued by Central/State government containing the address and self-declaration document from High Court.
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Now that you have understood the requirements, it is the chance for you to prepare the necessary documents before you choose the DP. As there are several DPs in the market offering incredible services, choosing a one becomes difficult.
Under such conditions, ensure that you perform a research of the providers, their credibility, and performance. It is essential to choose the one with good reputation, as you will be handing over the power of attorney to carry out the transactions.
Ensure that the money you invest is going in the right direction. Hope this information on How to open an online demat and trading account in India was helpful to you. Can you share What difficulties did you face when opening an online demat account?.