There are currently two depositories in India: The National Securities Depositories Limited (NSDL) and the Central Securities Depositories Limited (CDSL).
They facilitate the investor’s securities like the shares, mutual funds, and debentures in an electronic format. The depository acts like a bank.
They deal with agents who are referred to as Depository Participants (DP). They can either be an agent, a bank or any other financial institution.
What is a demat account?
A demataccount or a ‘dematerialised’ account is the first essential step in the process of becoming an investor or a trader. It helps an investor trade in the market by aiding in the buying, selling and trading. The portfolio can be managed from this trading account– that holds the e-certificates of shares, bonds and mutual funds- in a dematerialised format.
Such an account facilitates the transfer of the ownership of the instruments and also guides the investor in making the right investment choices. A Depository Participant can help an investor open such an account. Different DP’s offer Demat accounts with varying facilities.
In accordance with the Securities and Exchange Board of India, the shares from a demat account cannot be sold or traded physically at any of the exchanges.
This can be done only through the Bombay Stock Exchange or the National Stock Exchange.
How does it work?
A demat account works similarly to a bank account. However, money is traded in the form of shares and securities. These are credited and debited directly from the account of the investor,and this will reflect directly in the account.
A demat account number or the beneficial owner identification number (BOID) is used as the reference and is quoted for every transaction to occur. It is the key to all trading on-goings. This account can be accessed with the help of an internet password. A person can hold multiple demat accounts under one name.
A demat account can also be opened under joint holders. A minor is also allowed to open an account. However, this is handled by a guardian until the minor comes of age.
There are various facilities online that can be availed for the setting up of a demat account. Every account handler has various fees associated with them. Most of them also offer offline trading options.
What is the advantage of having a demat account?
The advantages of setting up an account such as this are that all the processes are undertaken online. This helps to reduce the paperwork and the risks involved, thus offering faster settlements that can be accomplished in minutes.
The stock certificates are traded in the form of electronic certificates that can be traded with ease. There is no upper or lower limit on the shares that can be sold.
Another advantage of demat accounts is that there are no stamp duties involved in the electronic transfer of shares.
Opening a demat account online is far easier than dealing with physical shares. It does not require a third person to deal with the day-to-day activities of trading shares. With the right knowledge of the basics, decent yields can be obtained at relatively low risks.