Opening a demat account is mandatory to invest in the stock market. It holds various securities like bonds, stocks, government securities, mutual funds, etc., and provides you with a convenient platform for trading. A demat account minimizes the risks associated with physical share certificates. Therefore, anyone who is interested in trading and wants to explore different financial instruments should open a demat account.
What is a demat account?
Demat account is a dematerialized account i.e. it holds your securities in electronic form. It eliminates the need for paperwork for buying and selling stocks and other securities.
How does it work?
Demat account works in a manner that is comparable to that of a bank account. However, instead of money, shares are debited or credited into your demat account. You need a trading account to buy shares from the stock market.
A trading account is linked to the demat account and bank account. The purchase order is placed through the trading account. If you have added sufficient funds from the bank account to the trading account, the money will be debited from the trading account and the shares will be credited to your demat account in T+2 days (T is the transaction date here). Upon selling the shares, they get debited from your demat account and the money gets credited to your trading account in T+2 days.
A trading account and demat account can be opened simultaneously. You will understand the basic difference between demat and trading account while learning the basics of trading. The trading account is just an interface or platform that you use to purchase or sell stocks. Once these transactions are completed, the shares get debited or credited to your demat account.
How to open a demat account?
You can open a demat account with a DP (Depository Participant) who is a registered demat service provider on NSDL and CDSL. The following steps will help you to open a demat account online:
Step 1: Find a suitable DP
Your trading preferences might change or remain the same with time. Therefore, it is better to opt for a demat account that allows you to trade in multiple market segments like equities, F&O, currency, commodities, etc.
The brokerage charged by DPs can vary greatly. It is recommended that you go through the brokerage, AMC (Annual Maintenance Charges), and other fees charged by different DPs. Also, do a comparative study of the demat services and investment tools and tips offered by them. All of this can make a huge difference in your trading experience. Therefore, you must choose a DP wisely.
Step 2: Fill the application form
Once you are sure about the DP with whom you want to open a demat account, visit their official website and fill an account opening form. Provide the necessary details in the form and ensure that they match with the details present in your documents. Documents that confirm your identity, income, and address are to be submitted with the application form. The following documents can be used for this purpose:
- PAN Card
- Aadhaar card, Passport, Voters ID, or any other government-approved ID
- Electricity bill, water bill, phone bill, ration card, or any other document that has your address mentioned on it
- Form 16, bank statement (of last 3 months), or salary slip
- A canceled cheque to cross-check your bank details
- Two passport-sized photographs
Step 3: Online verification
In-person verification is required to validate your account. It is possible to conduct online verification through a video conference. You may also upload your photographs and digital signature online.
Step 4: Sign The Agreement
Once the online verification is completed, the DP will ask you to sign an agreement. The agreement will mention the rights and duties of the DP and the account holder. If the documents don’t get verified, contact the DP office and find the reason for the same.
Step 5: Note down the BO ID
You will get a 16-digit BO ID i.e. Beneficiary Owner Identification Number after signing the agreement. Note down this ID as you will need to access your demat account.