An investor should have an online demat account and trading account mandatorily to invest in the stock market.
What is a Demat Account?
A dematerialisation or demat account that has made trading quick and safe is an online repository that stores an investor’s financial holdings electronically. An investor can trade or transfer securities held in a demat account digitally. Whether it’s your stocks, mutual fund units, bonds, exchange-traded funds (ETFs), commodities, or any derivative. you require your online demat account to hold all your financial assets electronically. Demat account has eliminated the cumbersome task of holding securities in physical form.
What is a Trading Account?
You need another account for online trading and that is a trading account. It is the gateway for stock exchanges and you can place a buy or sell order on the stock exchange. If you are a long-term investor, you have the option to open it later for delivery trades. Mainly it is the primary account day traders used to place a number of trading orders in a trading session.
How to do online trading using a demat account?
A demat account is necessarily required for online trading. It is an easy-to-open account with a depository participant registered with any of the central depositories – the Central Depository Services Ltd (CDSL) or National Securities Depository Limited (NSDL). To provide demat services in India, the SEBI has authorized two central depositories, working under the Depository Act of 1996. However, they do not deal with the investors directly. Their registered agents, called Depository Participants (DP), provide demat services to investors. DP can be a financial institution, bank, stockbroking firm, or an individual. The explanation of the formalities set by the SEBI to open a demat account and demat account functions are as follows.
Facilities associated with Demat Account Services
Following are the facilities of demat account that help investors to trade stocks:
Facilitates Online Trading
As per the SEBI, an investor can hold financial assets in the stock market digitally only. If you want to trade securities in the stock market, you require a demat account along with a trading account. Demat account to hold your securities and trading account to record the flow of debit and credit transactions of the securities.
Mitigation of risk
A demat account has mitigated risks associated with offline securities trading like damage, forgery, robbery, false delivery, etc. Digitized securities in the demat account have eliminated such risks as there is no scope for manual errors, damage, frauds, and fake deliveries.
Speedy transfers and settlements
Demat account is the time-saver for investors as trading transactions are settled online through clearinghouses. To trade the paper form securities, investors had to visit the stock exchange and registrar to transfer the securities first, and then transactions were cleared. It was a long process of months for a single successful trade. Using demat accounts, there is no lag to transact for share transfer.
Quick price discovery of different stocks
With a demat account, investors can open a trading account also. The trading platform provided by the depository participant facilitates investors to find the price of all listed stocks in one place.
After explaining ‘what is demat account’ and its functions, let us move towards formalities to open an online demat account and trading account.
Documentation Formalities for Demat Account Opening Process
You can open a demat account with reduced formalities and minimal paperwork as compared to the offline trading system. You need not visit stock exchanges or stockbrokers to open a demat account. Find a registered and suitable DP for you and fill an online form.
While you open a demat account, as per SEBI guidelines, you need to submit the following government-issued documents along with the duly filled demat account opening online application form:
- Permanent Account Number (PAN)
- Address Proof
- Passport size photos
- Bank statement of investor’s savings account
Once you have submitted the application form with the necessary documents, your DP will process the verification. It will also be an online step that can be completed through a video call from the DP or the rules laid by the DP as per SEBI regulations.
That’s it. You will be provided with your demat account login credentials after successful verification. Investors are free to open more than one demat account but with different depository participants.
This is all about ‘what is a demat account’ and the formalities to open a demat account online in an easy process.
