In this article we will understand the demat account in detail and also the Comparison between a Demat and trading account. We are sure that, all your queries in connection with this topic will be resolved after reading this article.
Demat Account– A demat account is an account in electronic format in which the investors can hold their securities either for short term or for long term. It is basically very similar to your bank account with the sharp difference that in a bank account you can keep your money while in a demat account you keep your securities either it is in shares, debentures, commodities, forex, mutual funds, etc.
A Demat account functions very much similar to a bank account with a difference that in a bank account you can deposit and withdraw your cash whenever you wants but you cannot sell your securities lying in a demat account because for that you needs a separate trading account. We shall also discuss about the trading account later in this article.
Now let us understands that how a demat account works and why do we need this with the help of below mentioned points..
i) We need demat account primarily for two reasons first to convert our physical holdings (if any) in to demat and secondly to directly apply to the new securities which you are purchasing for the first time.
ii) Also as per the latest amended rules in India you must have a demat account if you wish to apply in an IPO, FPO,etc.
iii) A demat account is opened with a depository. Presently there are only two depositories operating in india NSDL(National Securities and Depositories Ltd) and CDSL(Central Depositories Services Ltd) but common people cannot directly interact with these depositories for this purpose.
SEBI (which is the Indian securities market regulator) has allowed Depository Participants (in short DP) who acts as intermediary between Depositories and People to open and maintain demat account on their behalf.
iv) There are lots of DP in india generally most of the banks like HDFC, ICICI, SBI, etc have its separate DP division which operates in this segment only. A part from these there are many non banking Private players in market like Alankit Assignments, Zerodha, Sharekhan, Angel Broking, etc.
Having discussed about demat account above now we shall discuss about the benefits of a demat account. A demat account offers us many benefits discussed below:
i) You can keep all your securities belonging to different issuers and classes in one single account.
ii) After Demat of your securities you don’t have to worry about any loss, theft or any kind of physical damage to the securities as now they are in demat mode.
iii) You can transfer it very easily by following a very simple procedure.
iv) No stamp duty is payable in case of demat to demat mode transfer of shares which saves your cost.
v) ‘No odd lot problem’ i.e you can even sell as minimum as one share which is not possible in physical form.
vi) Automatic credit into demat account for shares arising out of bonus/split, consolidation/merger, etc.
vii) Holders can easily pledge their securities with lenders/banks because it enjoys a greater credibility as compared to physical shares.
viii) 24*7 Network- In a demat form you always have access to your account via log In ID and passwords provided to you by DP.
As we have understood about the demat account and now we shall discuss about trading account:
It is quite often seen that people are confused between a demat and a trading account and they use it interchangeably while there is a big difference between the two.
As mentioned above that a demat account is one in which you can hold your securities but to make a sale and purchase of those securities you should have a trading account in your name. Trading account as the name implies is an account with the help of which you can trade.
In short we can say that a demat account is like a stock(passive in nature) and a trading account is like a flow(active in nature). Thus when you make a sale transaction shares first get debited from your demat account and then it will reflect as a sale transaction in your trading account.
Can we have a demat account without having a trading account and vice versa…..?
Yes it is possible for example if you are going to apply for an IPO all you need to have a demat account to take credit of such shares if you get the allotment but you will need a trading account only if you wants to sell those shares.
Another example could be of “off market transfer” in which you get shares via transmission or as a gift from parents then in such case there is no sale of shares but only a transfer without consideration.
Similarly SEBI has allowed in some cases to have only trading account and no demat account like you trade in futures, options and currency derivatives you don’t need a demat account in such cases.
But when you opens a demat account usually a trading account is also opened by DP and there is no harm in opening both the accounts simultaneously instead you get a facility to trade in securities whenever you wants in future.
The author would also like to share some practical experience that now a days many DP are offering you free demat and trading account meaning -No account opening fee will be charged and also a waiver of one year AMC(maintenance) fee.
The government is also encouraging transactions in demat mode as a part of its Financial Inclusion initiative throughout the country which is reflected in some relaxations provided in holding a demat and trading account.
Therefore if you are thinking to open a demat account then also go for the trading account without any additional cost and link with your bank account. Only basic KYC documents like PAN, aadhaar, Bank Proof, etc are required to open these accounts.
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Absolute care is taken to prepare this article however inadvertently if any errors occur then neither the author nor publisher shall be held responsible for any such cause. The purpose is to spread awareness and it shall not be construed as rendering of any Professional advice in any manner whatsoever. Author also thanks the readers for reading this article.