Classroom: Demat Account

[K.Karthik Raja]

Classroom: Demat Account
4 Aug 2010, 0331 hrs

What is a demat account? What securities can I hold in my demat
account?

Today, to buy and sell securities, brokers insist on having a demat
account. Just as you open a bank account to hold money and make
payments, similarly you need to open a demat account now to buy and
sell securities in the financial markets. Today, all trades are
settled in dematerialised form i.e. in the form of electronic records
rather than certificates. Physical securities carry the risk of being
stolen, forged or faked, and hence, it is necessary for investors to
trade in demat form. A demat account can be used not only to hold
shares, but also mutual funds, debentures and exchange-traded funds
(ETFs). Hence, it is essential to have a
demat account.

How does one convert physical shares into demat form?

If you are holding shares in physical form, it is advisable to convert
them into dematerialised form. To get your shares dematerialised, you
have to open a demat account and get into an agreement with a
depository participant (DP). You need to surrender your physical share
certificates to the company which issued them, informing them and
giving details of your agreement with your depository participant. On
the basis of this, the company would cancel your certificates and
register your shareholdings in the name of your depository participant
as the registered owner of those shares and intimate this registration
through a notice to your depository participant. On receipt of the
aforesaid notice from the company, the depository participant would
register you as the beneficial owner of those shares. As a registered
owner, your depository participant has no rights of benefits from
those shares. All rights would lie with you as the beneficial owner.

With whom can you open a demat account?

You can open a demat account with any depository participant which
could be a bank or even a stock broker having the licence to do so
depending on your convenience. A broker is separate from a DP. A
broker is a member of the stock exchange who buys and sells shares on
his behalf and on behalf of his clients, though he could also hold a
licence to provide depository services. A DP will just give you an
account to hold those shares. It is not necessary for you to open a DP
account with your broker. Your account can be different from that of
the broker. Many brokers also offer you three-in-one trading accounts
which link your broking, demat and bank accounts online, thus making
it easier for you to trade. To view a complete list of registered
depository participants, you can visit the websites of NSDL and CDSL.

What are the charges incurred in a demat account?

Various entities could levy various charges while operating a demat
account. Broadly, there are three kinds of charges which a depository
participant can levy. The first is an account opening charge, which
also covers the cost of the agreement with the depository participant.
The second is the annual maintenance charge to maintain your account
and send you statements on a regular basis. The third charge is the
transaction charge which is charged every time you sell a security,
and request the DP to move it from your account to the broker’s
account.

K.Karthik Raja
www.kences1training.blogspot.com