How to Use Your Demat Account: From Opening to Trading

A Demat account, short for a dematerialized account, serves as a digital vault for holding financial securities in India. It replaces physical share certificates, allowing electronic storage of investments such as shares, bonds, mutual funds, and exchange-traded funds (ETFs). This digital format is a fundamental requirement for participating in the Indian stock market, enabling seamless and paperless trading. Demat accounts streamlined the investment process, eliminating risks and inefficiencies associated with physical documents.

Opening a Demat Account

Establishing a Demat account in India involves meeting eligibility criteria and submitting documents. Resident individuals 18 years or older, Non-Resident Indians (NRIs), minors (through a guardian), corporate entities, and Hindu Undivided Families (HUFs) are eligible.

The application requires mandatory documents to verify identity, address, and financial standing. A Permanent Account Number (PAN) card is mandatory for opening a Demat account. Proof of Identity (POI) documents include an Aadhaar card, passport, voter ID, or driving license. For Proof of Address (POA), utility bills (not older than three months), a passport, Aadhaar card, or bank statements are accepted.

Proof of Income is necessary for trading in derivatives, such as futures and options. This can be provided through income tax return (ITR) acknowledgments, salary slips from the last three months, Form 16, or a net worth certificate from a Chartered Accountant. Bank account details, confirmed with a cancelled cheque or bank statement, are also required to link the Demat account for transaction settlements.

Choosing a Depository Participant (DP) is a primary step. DPs, which are typically banks or brokerage firms, act as intermediaries between the investor and the depositories (National Securities Depository Limited and Central Depository Services Limited). The application form, available online or offline, must be filled with personal and financial information. The Know Your Customer (KYC) process is a regulatory requirement, ensuring identity verification and preventing illicit activities.

KYC can be completed electronically (e-KYC) using an Aadhaar card linked to a mobile number, which facilitates an OTP-based verification. Alternatively, an In-Person Verification (IPV) might be required, which can involve a physical or video interaction to confirm identity. Linking the Demat account with a savings bank account allows for financial transactions, while linking it with a trading account is essential for buying and selling securities on the stock exchanges. These linkages create a unified platform for investment activity.

Conducting Transactions with Your Demat Account

Once active, a Demat account facilitates various securities transactions. Investors can convert physical share certificates into electronic form through dematerialization. This involves submitting a Dematerialization Request Form (DRF) along with the physical certificates to the Depository Participant (DP), who verifies and forwards them to the company’s registrar for electronic conversion and credit to the Demat account.

For Initial Public Offerings (IPOs) or other corporate allotments, shares are directly credited to the investor’s Demat account upon successful allocation.

To sell securities, an investor places a sell order through their linked trading account. Upon execution of the trade, shares are debited from the Demat account, and proceeds are credited to the investor’s linked bank account.

Offline transfers for selling securities may require a Delivery Instruction Slip (DIS), a physical form submitted to the DP authorizing the debit of shares. Online methods through the DP’s portal or mobile application allow for electronic authorization of such debits.

Conversely, when buying securities, funds are debited from the linked bank account, and the purchased shares are credited to the Demat account, typically settling within one business day (T+1) in India.

Beyond trading on exchanges, Demat accounts support off-market transfers, which involve transferring securities directly between two Demat accounts without going through a stock exchange. Securities held in a Demat account can be pledged as collateral to avail loans from financial institutions. This facility allows investors to leverage their holdings for liquidity without selling them.

Managing and Accessing Your Demat Account

Investors can access and track their holdings and transaction history through online portals and mobile applications provided by their Depository Participants. Periodic statements, often sent via email or accessible online, provide a detailed summary of activities and current portfolio.

The nomination facility is an important feature, allowing account holders to designate a nominee who will inherit the securities in the event of their demise. In India, it is mandatory to either add a nominee or formally opt out of nomination, and this can be done online or by submitting a physical form to the DP. Investors can add up to three nominees and specify the percentage of holdings each will receive, and this nomination can be changed at any time.

Demat accounts incur various charges, including Annual Maintenance Charges (AMC), which typically range from ₹100 to ₹1000 annually, though some DPs may offer a free first year or lower fees for Basic Services Demat Accounts (BSDA) for small investors. Transaction charges are levied for each debit transaction from the account, and custodian fees may also apply for holding securities. Dematerialization and rematerialization charges are incurred for converting physical to electronic shares and vice versa.

Updating personal details, such as a change in address or name, requires submitting an account modification form and relevant supporting documents to the DP. This ensures compliance with regulatory requirements and smooth communication.

An account holder can request to freeze their Demat account, which temporarily restricts transactions, providing a layer of security against unauthorized access or during periods of inactivity.