Are you thinking of investing in the stock market? Or maybe park some funds in mutual funds? Some of the requirements for investing, such as a functioning bank account, PAN card, are common among investors. But you need one more thing to ensure your investment transactions go through safely: a Demat account.
What is a Demat account?
The shares that are traded on the stock exchanges are in electronic form. This means that, unlike earlier times, when companies used to hand out share certificates for share purchases, all your purchases will now be online. The account to consolidate your investments is called a Demat account.
The word Demat stands for a dematerialised account. Dematerialization is the process to convert physical shares into electronic form. Most of the companies have now wholly converted their physical shares into electronic form, which makes it convenient to trade.
A bank account and a Demat account share similar concepts. It keeps track of the instruments purchased and sold. You can get a balance statement, which shows the shares, mutual funds, and other devices you own as on a particular date. This makes it very convenient to keep records and to access them at any time.
How to apply for a Demat account?
It is possible to open a Demat account both online and offline. The procedure for both is almost similar. The company who you will open a Demat account with is called a depository participant (DP). In India, two depositories maintain records for the investors: National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited (CDSL). Each DP is affiliated with either NSDL or CDSL.
Depending on the Demat account charges and services, you first need to select the DP you want to open an account with.
In the online application, you can apply on the DP’s website, and someone from the DP will contact you to collect your documents and to sign a power of attorney (POA). A power of attorney is necessary because it allows the depository participant (DP) to make transactions in your name.
The DP will need documentation from you to fulfil Know Your Customer (KYC) norms. These documents are:
• Filled KYC application form
• PAN card of the applicants
• Address proof for the applicants
• A recent photo along with the form
• A cancelled cheque for bank account details
Once the application form is collected and processed along with the documents, the DP will issue a Demat account number.
One important point to remember is there are Demat account charges, for account opening, purchase, sale, annual maintenance, and other costs. Reading about these charges before opening a Demat account is essential.