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The ABCs of a demat account

Demat account refers to the account, in which, shares and securities are held in an electronic format.

What does demat stand for?

Demat stands for dematerialisation. The demat system was introduced in India in 1996 for trading on the stock exchanges. Earlier, investors could hold their market securities in the physical form. However, after dematerialisation was introduced, the SEBI mandated all investors to open a demat account and hold their securities in the electronic form.

The purpose of demat

The purpose of a demat account is to hold shares and securities in an electronic format. Holding shares or equities, in their physical form, is both cumbersome and outdated. Additionally, there are several concerns associated with holding shares physically. For instance, physical shares could be lost, damaged or misplaced. Also, since SEBI made dematerialisation mandatory, you cannot sell your securities in the absence of demat. When stored in an electronic form, your securities are safe. In demat, the physical shares are converted to the electronic format. Therefore, it becomes easy to access them and trade in them. Today, there is no trading of physical shares.

How share-holding worked in the absence of demat and how it has since changed

Let us say you purchased Company X’s shares. Earlier, when you bought shares, they would be physically transferred to you in the form of share certificates. The share certificates would have your name on them. Every time a share was sold or transferred, the new owner’s name was added on to the certificate. This involved a lot of paperwork and time, not to mention, unnecessary hassle. Certificates could be lost in transit and then to get them re-issued would take months.

The demat system did away with the paperwork and made the share-holding process a lot more safer and convenient.

How to open demat account online – the steps to follow

    1. Choose a Depository Participant (DP). Most financial institutions, like banks and brokers, provide DP services.
    2. Fill the account opening form by providing details such as PAN number, date of birth, etc.
    3. You can either use the Digilocker facility offered by the Government of India to fetch your documents or use your Aadhar number to complete the e-KYC process. The purpose of KYC is to establishing the identity and verifying the credentials of a customer. e-KYC is the process of doing this verification online without the need for physical documents.
    4. Your bank account details can be verified by the penny drop facility by depositing Rs. 1 in your bank account. Otherwise, you can upload a copy of your cancelled cheque, bank statement or a copy of your bank passbook to verify your bank account details.
    5. You should keep your signature image handy to complete the process.


Opening the demat account offline

The demat account opening process can also be completed offline. Download the account opening form from your DP’s website, fill it and submit it at one of the branches along with the documents listed in their official valid documents (OVD) list.

Demat account opening involves annual maintenance and transaction charges. Many service providers also offer free demat account opening services.

Disclaimer: The contents herein mentioned are solely for informational purpose and shall not be considered as an invitation or persuasion to trade or invest. I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon.

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