Demat or Dematerialized account is the first basic requirement for trading in the stock market. You can open Demat account with a service provider, known as the stockbroker. As a newbie investor, it is essential to understand the differences between various providers – full-service brokers and discount brokers prevalent in the market to understand the costs and services under them.
What is Demat Account?
Demat Account plays the role of holding shares of investors while trading in the stock market. Since the share markets are fully digitized, shares are traded electronically and held in the Demat account of investors.
Choosing a Demat/Trading Provider
You can choose a brokerage firm based on the following criteria –
- Services – Full services brokerages provide additional services along with the Demat and trading account. They also cater to the research and advisory needs of the investors. A discount broker offers Demat and trading account with basic tools like charts for you to analyze and make trade decisions by yourself.
- Cost – Full-service brokerages will charge percentage-based commission proportional to your trade volume. A discount broker will charge a flat fee per trade irrespective of the trade volume. To illustrate, suppose you bought 100 shares with price Rs.100 each. Traded volume = Rs. 100 x 100 = Rs.10,000. Assuming Full-service broker charges 0.5% and discount broker charges Rs.10 per trade, the brokerage payable will be as below:
Brokerage charged by full-service broker= Rs. 10,000 x 0.5% = Rs.50
Brokerage charged by discount broker= Rs. 10 (Irrespective of trade volume)
How to Open a Demat Account?
To open a Demat account, simply visit any brokerage house’s website and understand the various plans they offer. The depository participants (or DPs) are registered with the two depositories in India, i.e. NSDL (National Securities Depository Limited) and CDSL (Central Depository Services Ltd). The DPs are private companies running under the purview of the regulatory authorities which provide the storage facility for all securities traded electronically in the form of a Demat account.
There are various documents to be submitted and ensure you choose the right brokerage before signing up. Your PAN, address details, bank details and identity proof are mandatory for opening a Demat and trading account. Trading account is the account for executing transactions. All buying and selling of securities happens via a trading account. You will usually open both the accounts together.
After submitting the documents, you can e-sign the form by validating the OTP sent on your Aadhar linked mobile number. In-person verification can be done online by recording a short video and uploading it. This is to authenticate that the details are being submitted by the same person and not anyone else.
Along with the basic application form, you will also have to sign a specific document for trading – called the Power of Attorney (PoA). It basically gives the right to the brokerage to execute sell instructions from your trading account.
Learning more about Demat account
When opening a Demat account, do check the various charges associated with a Demat account. Also, do learn about the various instruments such as mutual funds, bonds, ETFs that can be stored in the Demat account.
Once you open Demat account, you will get registered with your DP and receive a separate statement of securities each month showing the balance in your Demat account. Thus, you can keep a track of your holdings and stay better placed in terms of your finances.