Knowledge Base

What is a Demat Account?


in Basics of trading
Tags: demat accountIL&FS

demat account

What is a demat account?

If you are new to the stock market, you would have been told that you cannot trade without a demat account. This is different from a trading account. Brokerage firms offer one or both these accounts. Some are even bundled together. It may be confusing.

Here is a low-down on the demat account:

  • What is a demat account: Earlier, when you traded on the stock market, you would have received a physical copy of the stock called the share certificate. This, however, made trading very difficult for the simple reason of logistics. As a result, the government introduced an electronic format of shares. Since there is no physical ‘material’ copy of the share certificates any more, it is called ‘dematerialization’.  The place where these dematerialized share certificates are stored is called a demat account. Think of a bank account; it holds all your money, right? Similarly, the demat account holds all your shares.
  • Why it is required: In 1996, the stock markets initiated dematerialization. Since then, the market regulator, Securities and Exchange Board of India (SEBI), ruled that demat accounts be mandatory for conducting any trade in the stock market. This includes the IPO or primary market, the secondary market where you buy or sell shares, as well as the derivatives market where you trade in futures and options contracts. This is because, the demat account acts as the delivery address when you give an order to buy or sell shares. It is where shares are delivered once your order is processed. So, without demat accounts, delivery of shares would not be possible. That said, you can continue to hold physical copies of share certificates you had bought before the dematerialization process. This is only for old investors. If they wish to sell these shares today, it has to be in the dematerialized form.
  • What are depositories and DPs: Let’s go with the bank account example we gave before. Imagine a bank where there are millions of lockers. Each locker belongs to one individual and contains their contents. Similarly, a depository is like the bank which holds your demat account. In India, we have two central depositories – the CDSL or Central Depository Services Ltd and the NDSL or National Depository Services Ltd. These two depositories hold all your share certificates. They are essentially a central storage option. These two depositories allow certain financial institutions the right to offer demat services. So, as an investor, you have to approach these institutions like banks and brokerage firms to open a demat account at either CDSL or NDSL. They are called depository participants or DPs. Consider them to be the branch in your locality. Your demat account will be identified by your unique number as well as the identification code of your DP.
  • Demat v/s trading account: So where does the trading account come into the picture? Are they different? The trading account serves an entirely different purpose. Let’s use the bank account example again. The demat account is like your savings account, while the trading account is like your net banking portal. It helps you look at your account’s details as well as conduct transactions. To simplify it, the trading account helps you place orders for buying or selling securities; once the order is processed, the shares will be deposited to or debited from your demat account. This is why both of them are equally important. It is like the postal service. Without the postman, you can’t send or receive your letter, and without the address, the postman wouldn’t know where to deliver the letters to.
  • How to open a demat account:If you are a New client with RKSV, We will send you the trading as well as demat account application form to fill out via email. You can also download it here. After we have received your form, our account opening team will verify the forms as well as all supporting documents. After we receive your account document(s), we will go over the documents over the next 2 business days. If we find any discrepancies or missing documents, will will intimate you immediately. Otherwise, we will conduct a IPV (In-Person-Verification) to verify your documents. After that, you are ready to begin trading!

    If you are an existing client of RKSV, We will send you only the demat account application form to fill out via email. You can also download it here. Once we have received your form, our account opening team will verify the forms as well as all supporting documents. If we find any discrepancies or missing documents, will will intimate you immediately. Otherwise, we will have a confirmation call to verify your documents. After that, you are ready to begin trading!

  • How to link to a trading account: So you already have a demat account, and only want it to get it linked to your RKSV trading account. Fret not. When you get your trading account opened, send us a copy of your Client Master Report (CMR) from your other broker. Or, you can also ask your broker to send it to us. We will then do the needful.Please note that you cannot sell the shares from RKSV. Once you buy shares for delivery, you have to sell it only from your linked Demat account. You cannot transfer them to RKSV and sell it from here. The best option is to open a demat account at RKSV, by paying just one time non refundable charge of Rs. 300 and you can enjoy a hassle free method for delivery-based trading.

Dematerialization Process

Have you wondered what exactly happens when you buy or sell a share? Let’s break it down. When you buy a share in the stock market, your broker helps execute the trade for you. At the end of the day, you own a piece of that company and that piece is then sent to your demat account (your “delivery address”). Your demat account is maintained by the depository participant and you are free to take those shares to another broker. When you sell, the shares leave your demat account and the sale amount goes to your trading account. You can then transfer that to your bank account.

demat account process

Click here for Part 2: Common questions about demat accounts