What Is A Demat Account?

If you’re an Indian resident and want to invest in stocks, options, or mutual funds, then a Demat account is essential. Built on the idea that investors would prefer not to be exposed to currency risk when trading securities across international markets, these accounts help investors purchase shares of American and other overseas companies. In our post we’ll cover the broad details of what Demat accounts are, who should have one and why – as well as listing many of the top Demat account providers in India.

What Are Demat Accounts?

Demat accounts are essentially accounts in which investors hold their shares, certificates and bonds. The name itself is derived from the word “dematerialized.” This type of account was invented in 1968 by the National Clearing Corporation in the US and was later adopted by India. Essentially, holders of shares and other securities who are residents of India can open up one or more DDAs (Dematerialized Depository Account) at a registered stockbroking company with whom they must maintain a minimum balance to trade.

Many brokerages will allow an investor to open an unlimited number of Demat accounts. However, there are only a few high-street stocksbrokers that offer this facility. Even with the large number of Indian stockbrokers, Demat accounts are still considered to be a complex and tedious process for those who don’t have any prior knowledge or experience.

Some of the best-known names that offer DDAs include BNP Paribas, Kotak Mahindra, ICICI Securities and Religare Securities. Some brokers, however, like Yes Broking (formerly BSE Dealing) only cater to large corporations and institutional investors – though it does offer demat accounts since 2012. Certain brokers will offer DDA accounts with a minimum deposit of Rs. 2500, while others will even allow you to open an account with just Rs. 500 rupees.

Why Should You Have A Demat Account?

Many investors would prefer not to be exposed to currency risk when trading securities across international markets. Based on this idea, demat accounts help investors purchase shares of American and other overseas companies. If your stockbroker is offering such an account, then it’s likely that it is a high-volume trading platform. This probably means that the account allows for large trades in stocks and other securities, with little or no authentication.

You should not open a demat account as a beginner. Here’s why:

1. Demat accounts can be complex, time-consuming and require certain amounts of money to be kept in order to trade – which means you’ll have to have the money at hand in order to use the account. This is rather inconvenient, especially if you have a high-street stockbroker.

2. It can be difficult to withdraw money out of a demat account. Demat account holders must maintain a minimum balance in their account, and if they don’t update the same when they close their account, they will lose this amount.

3. Demat accounts are not insured, which means that financial loss can occur if you’re not careful with your amounts and holdings. The dematerialization act is silent on what happens when such accounts are lost or stolen – so no insurance coverage or recourse is available from the government.

4. In case you do decide to open a demat account with a particular stockbroker, it may not have a local branch in your area. This means that any kind of information or support you need may be difficult to access – as well as being cheaper.

5. You cannot purchase or sell shares in an online demat account. This is therefore not convenient for people who would like to buy and sell shares regularly – as they’d have to visit the branch each time they have interest in changing their holdings. This can be frustrating and time-consuming, especially considering that there are so many brokers online today that offer online trading facilities.

6. Most top stockbrokers do not offer demat accounts. This means that you will have to open an account with a lower-end broker if you want to use this account as your primary trading facility. Brokers like BNP Paribas, Kotak Mahindra and ICICI securities, for instance, do not offer demat accounts at all – despite their large size.

While the use of dematerialized accounts has come under some criticism in recent times with the government cracking down on certain fraudulent activities that occurred through these platforms, they are still a necessary part of investing in Indian shares and bonds. If you’re an Indian resident and want to invest in stocks, options, and mutual funds, then a Demat account is essential.