What Is a Demat Account: What Are Its Uses
What Is a Demat Account?
A demat account is an account to hold your shares and securities in electronic form. The shares and securities get credited or debited whenever a transaction takes place. To simplify the meaning of the demat account, you can think of this account to be similar to a bank account that holds your money. In the demat account, the money gets replaced with shares and securities.
Uses of a Demat Account
The Securities and Exchange Board (SEBI) of India has made it mandatory for investors to open a demat account to transact in the Indian financial market. The reason for it is that the demat account is cost-effective, safe and convenient. By holding the shares and securities in electronic form, the risks relating to theft, loss and mutilation of share certificates do not exist. Moreover, transacting through the demat account is a paperless task, which makes it even more convenient and cost-effective.
In addition to stocks, a demat account can also hold bonds, mutual funds, exchange-traded funds (ETFs), government securities, and other financial instruments. This makes it a one-stop solution for managing your entire investment portfolio digitally. You can monitor your holdings, track portfolio performance, and receive dividends and interest directly in your linked bank accounts. With growing digital adoption and mobile apps offered by brokers, accessing and managing a demat account has become easier than ever.
Types of Demat Account
| Type of demat account | For | Key features |
|---|---|---|
Regular Demat Account | Residents of India | Used for holding shares and securities electronically. Linked to a trading account. |
Repatriable Demat Account | Non-Resident Indians (NRIs) who want to transfer funds abroad | Requires linking to an NRE (Non-Resident External) bank account. Allows fund repatriation. |
Non-Repatriable Demat Account | NRIs who don’t intend to repatriate funds | Must be linked to an NRO (Non-Resident Ordinary) account. Funds cannot be moved abroad. |
Basic Services Demat Account | Small investors and beginners | Lower or zero maintenance charges. Holding value should not exceed Rs.2 lakhs. |
How to Use a Demat Account?
Using a demat account is very simple and easy. To operate a demat account, all you need is an active internet connection and login id. You can open a demat account by visiting a stockbroker or Depository Participant (DP).
The first step towards opening a demat account is selecting a DP or stockbroker. A DP acts as an intermediary between you and the depository. You must fill the account opening form and submit the necessary documents like PAN card, identity proof, address proof, passport size photograph, etc. to the DP. An agreement copy would be handed over to you by the DP consisting of the charges, rules and regulations. Now, an in-person or online verification shall be carried out to verify the details submitted by you. On successful verification of the application, you will be provided with a client id and demat account number. You can log in to your demat account to buy or sell shares and securities.
Along with the demat account, you also need to open a trading account. With this trading account, you can carry out buying or selling of shares. When you purchase or sell a stock using the trading account, it takes T+2 days for the stock to get credited or debited into the demat account. The broker will transfer the shares into your demat account if the amount of purchase is paid by you before the stipulated date.
Demat Account vs Trading Account
A demat account is used to hold securities such as stocks, bonds, mutual funds, and exchange-traded funds in an electronic format. It acts like a digital locker for your investments, eliminating the need for physical share certificates. The demat account only stores the financial instruments; it does not facilitate buying or selling.
In contrast, a trading account is used to place buy and sell orders in the stock market. When you want to purchase a stock, the trading account initiates the transaction, and the purchased shares are then stored in the demat account. Similarly, when you sell shares, the trading account executes the order, and the corresponding shares are debited from your demat account.
Both accounts are linked to your bank account to enable seamless fund transfers. While the trading account handles the market transactions, the demat account ensures safe storage of your securities. Both are essential for online investing.
To summarise:
| Demat Account | Trading Account |
|---|---|
Acts like a digital locker to hold securities in electronic form | Used to place buy and sell orders in the stock market |
Only stores financial instruments; does not facilitate transactions | Facilitates market transactions like buying and selling of shares |
Shares bought via the trading account are stored in the demat account | Initiates the purchase or sale, while the demat account manages custody |
Linked for fund transfers and settlement | Linked for payments when buying or credit when selling |
Ensures safe and paperless storage of investments | Enables real-time access to market and execution of trades |
Is Trading Without a Demat Account Possible?
When you purchase shares on delivery basis, it is mandatory to have a demat account to store that purchase in the electronic form. Moreover, it is not easy and feasible to buy or sell shares in physical form. In addition, the number of dealers willing to purchase or sell shares in physical form is very low. Therefore, opening a demat account is compulsory when there is delivery of shares. However, while trading in derivatives, exchange-traded funds, currency and commodities, it is not compulsory to open a demat account. This is because they do not involve delivery of stocks and settlement is done on a cash basis.
Tips to Effectively Manage a Demat Account
Managing a demat account wisely is key to protecting your investments and ensuring long-term financial growth.
- Regularly review your holdings: Keep track of your portfolio to stay updated on performance and identify underperforming assets.
- Update personal information promptly: Ensure that your contact details, nominee, and bank account details are current to avoid transaction issues.
- Be cautious of idle accounts: Inactive accounts may attract unnecessary charges or become vulnerable to misuse.
- Avoid unnecessary trades: Frequent buying and selling may increase transaction costs and impact overall returns.
- Use strong passwords and two-factor authentication: Safeguard your account from unauthorised access.
- Check account statements and alerts: Regularly verify SMS/email alerts and statements for unauthorised or incorrect entries.
- Choose a reliable Depository Participant (DP): Opt for reputed service providers to ensure smooth service and minimal hidden charges.
Good demat practices help protect your assets and enable smoother investing.
Conclusion
A demat account is more than just a digital locker – it’s the foundation of modern-day investing in India. With features that ensure safety, convenience, and paperless transactions, it simplifies how you buy, hold, and manage various financial instruments. Whether you are an individual investor or an NRI, choosing the right type of demat account and managing it effectively can enhance your financial journey. With the added support of a trusted broker, opening and maintaining a demat account becomes seamless, helping you invest with confidence and security in today’s digital-first market.
FAQs
What can I store in a demat account apart from stocks?
A Demat account can hold:
- Bonds
- Mutual Funds
- Government Securities
- ETFs (Exchange-Traded Funds)
- Corporate Deposits and other financial instruments
Can NRIs open a demat account?
Yes, NRIs can open either a Repatriable Demat Account (linked to an NRE account) or a Non-Repatriable Demat Account (linked to an NRO account), depending on whether they want to transfer funds abroad.
Can I have multiple demat accounts?
Yes, you can open multiple Demat accounts with different Depository Participants (DPs), but all must be linked to your PAN. However, maintaining multiple accounts may incur extra charges.
Is it mandatory to link my PAN card with a demat account?
Yes. As per SEBI regulations, linking a PAN card is mandatory to open a demat account. It helps in preventing duplication and ensures compliance with KYC norms.
What happens if I don't use my demat account?
Inactive or dormant demat accounts may be disabled by the DP after a long period of non-usage. Also, such accounts may still attract annual maintenance charge (AMC). It's good practice to either use or formally close accounts you no longer need.
This article is for informational purposes only and does not constitute financial advice. It is not produced by the desk of the Kotak Securities Research Team, nor is it a report published by the Kotak Securities Research Team. The information presented is compiled from several secondary sources available on the internet and may change over time. Investors should conduct their research and consult with financial professionals before making any investment decisions. Read the full disclaimer here.
Investments in the securities market are subject to market risks, read all the related documents carefully before investing. Please read the SEBI-prescribed Combined Risk Disclosure Document before investing. Brokerage will not exceed SEBI’s prescribed limit.
