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Finance

Why is a Demat Account Mandatory for Share Trading?

The SEBI has mandated the Demat account and trading accounts as prerequisites for investing and trading in most of the financial securities in the stock market. 

In this day and age of technology, no one would want to worry about physical share applications. Also with new medical health scares, remote work is the new buzzword. To avoid such inconvenience 99.9% of transactions in the stock market take place in dematerialized mode only.

A Demat account is here to handle all your investment holding tasks. You need not hold securities in hand and go to the company office. You need to open a Demat account and trade in the stock market from the comfort level of your home. Let us discuss what is Demat account and its requirements along with its benefits.

What is a Demat Account

A demat account is an account with your depository participant (stockbroker) that facilitates trading in dematerialized mode. It is mandatory as per the SEBI Depositories Act, 1996 to open a Demat account for trading at the stock exchanges. The depository participant is a registered agent of the national depository in India viz. National Securities Depository Limited (NSDL) and Central Depository Services Limited (CDSL). Through a DP, it interfaces with the investor and provides depository services. 

However, small investors, holding a maximum of 500 shares in physical form, are provided with an additional trading window by the stock exchanges. It is a one-time facility to sell shares held by investors in paper form.

Points to be considered

  • A nominee appointment is mandatory as per SEBI instructions.
  • You can open a Demat account in joint holders’ names also. A maximum of three individuals can open a joint Demat account. 
  • Non-Resident Indian (NRI) can also open Demat accounts in India.
  • An individual can have multiple Demat accounts as per his/her choice.
  • No Demat account can be opened in the name of HUF. 

Benefits of Demat Account

The benefits of a Demat account are listed below:-

  • Safe and convenient 

A Demat account is a completely safe and secure way to hold securities. It is safe with your registered brokers.

  • Immediate transfer of securities 

You need not wait for transferring the ownership of shares. Before the introduction of Demat accounts, it took around one month to transfer securities.

  • Multiple Securities 

You can hold a variety of investments of equity and debt instruments in a single Demat account. If you want you can open multiple Demat accounts to hold different types of investment.

  • No stamp duty on transfer of securities

Transfer of shares in paper format involves stamp duties that increase the transaction cost but the Demat account has eliminated such extra costs. 

  • Elimination of risks 

Paper form securities are associated with risks such as bad delivery, delays, fake securities, thefts, etc. Dematerialization has eliminated such risks.

  • No odd lot problem 

Demat accounts have solved odd lot problems. Investors can buy/sell even one share. 

  • Automatic credit 

Investors will get the benefit of shares, arising out of bonus/split/consolidation/merger, etc automatically in their Demat account.

Demat Account Opening Process

An investor needs to contact a Depository Participant. You cannot open a Demat account directly with the national depository. It has to be opened only through a DP. A bank’s brokerage arm offers a three-in-one account and brokers other than banks offer a two-in-one account that includes a savings account, Demat account, and trading account. 

You can open Bajaj Financial Securities Limited (BFSL) trading account and Demat account online. You need to fill up a Demat account opening form online. Following are the documents to be submitted with account opening form in digital form:  

  • Identity proof 
  • Address Proof 
  • Income Proof 
  • PAN card 
  • Bank statements
  • Passport photo
  • Signature on white paper

All documents should be in digital form so that they can be uploaded online in digital form.

The DP will approve your Demat account application form and give you a unique account number that will be used for all future transactions of share trading. 

With a BFSL trading account, you can save on brokerage costs as you have to pay a flat brokerage rate per trade instead of the percentage-based brokerage fee.

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