Long back before Demat account was introduced, shares were held in physical formats meaning in actual paper format. There were lot of challenges with the physical format.
In 1996, to further avoid this problem, Government of India introduced depository system via Depository Act 1996. The main purpose was to keep up with the world markets in work efficiency as well as to keep a check on frauds.
Let’s understand this in a similar manner to that of your Bank account. Your Bank account holds your Money safe for you. In a similar manner, Demat Account holds your shares, bonds, securities etc. in a digitalized manner. Dematerialization Process is the process of converting your physical shares and securities into digital format. Demat account holds all these shares and makes trading easier for us.
It is must to have a Demat Account for anyone who wants to deal with financial securities according to SEBI guidelines. It is mandatory if you want to venture out in stock market.
Storing in Electronic form of shares eliminates the problem of theft, damage etc. The prevalent issue of forgery is also eliminated.
Handling of shares is now safe. It makes the transactional and operational process 100 times easier. It provides us with a single integrated platform. It has other perks like less paperwork, it is more convenient and cost effective. There is no need of multiple channels of communications.
Before we understand how to open a Demat Account, lets be clear about few terms
It is a place where financial securities are held in dematerialized form. It is responsible for maintenance of ownership records. There are two depositories which are functional in India – National Securities Depository Ltd (NSDL) and Central Securities Depository Ltd (CDSL).
The owner of the securities is known as the Investor.
A Depository Participant (DP) is described as an Agent (law) of the depository. They are the intermediaries between the depository and the investors. Any depository service has to be channeled through the DP.
The interaction between Investors and the
Depositories happen through Depository Participants. Here the role of Demat Account
comes into play as an Investor has to open the account to further participate
in the market.
Opening Of Demat Account
Selection of Depository Participant after comparing w.r.t services and benefits.
Properly filing and submitting the form of the DP.
Submission of requisite KYC documents such as PAN card, ID proof, Residence proof etc.
Then Verification of your KYC documents will happen. At this stage, certain fee needs to be paid in accordance with the policy of DP.
After successful Completion of Verification process your account will be opened. A Unique ID will be provided to you.
Recently, because of change in market situations due to Covid Pandemic, account opening is now also done via online process.
Most of the process remains the same and business is conducted via help of OTP's and providing virtual information.
You may have to grant Power of Attorney in favour of your broker and/or DP to operate your account, i.e. make transactions in your bank and DP account and buy or sell shares on your behalf.
Caution is advised before signing. Read the document carefully.
Proof of Identity (POI): Driving licence, Voter’s ID, UID or Unique Identification Number etc.
Proof of Address (POA): Passport, Voter’s ID, Aadhaar, ration card etc.
Proof of Bank Account: Cancelled cheque leaf can be provided for this purpose.
Proof of Income: It is mandatory to submit income proof if you wish to trade in Futures and options.