Today, investing is the new mantra of the stock market's life. While many people invest in stocks, bonds, and other securities, a Demat account is what makes it possible to store them. It acts as your digital account for all the securities bought/sold throughout.
Demat account is an electronic storage for stocks, bonds, mutual funds, or any form of security. It eliminates the need for physical certificates and instead provides digital access whenever needed. But have you ever wondered how else you can use a Demat account?
Continue reading this blog to discover how a Demat account is important for your stock market trades!
What You Can Do With A Demat Account?
A Demat account's primary use is to store securities like stocks, bonds, and others within it. Earlier, when investors used to buy securities, they received a paper certificate in return. However, it was difficult to store it, and the chances of losing it were equivalent.
With a Demat account, you can;
Hold Shares and Securities Digitally
As said before, investments earlier yielded physical certificates. However, a Demat account uses its digital storage to hold investments in electronic form, in a safe, secure, and paper-free way.
Use the Demat A/c to hold,
- Stocks (equity shares)
- Mutual Funds
- Exchange-Traded Funds (ETFs)
- Government Bonds
- Corporate Bonds
- Debentures
- Gold Bonds (like Sovereign Gold Bonds)
Buy and Sell Shares
With a Demat account, you can hold as many shares as you want. However, while transactions are executed with a trading account, the shares are settled in your Demat Account. In other words, the actual buying/selling happens in the trading account, and the volume and quantity held are visible in the latter.
So, when you buy a stock, shares get credited to your account, and vice versa.
Apply for IPOs
In addition to equity purchase, you can also apply for IPOs (Initial Public Offerings) with your Demat account. Once allotted, the shares get directly credited to your account. It also applies when a company issues Bonus shares, Stock splits, and Rights issues.
Pledge shares for Margin/Loan
Now, if you want extra funds (or margin) to trade, existing shares in your Demat account can help. You can pledge shares from your Demat A/c and get access to funds without selling your investments.
How A Demat Account Works (Behind-the-Scenes)
While a Demat account uses its electronic securities storage, it has a whole mechanism to keep your shares safe. Let us know how a Demat account works and the parties involved!
Key Players or Parties Involved
To understand how it works, you should be familiar with the three main entities:
- Depository: Like NSDL or CDSL, these depositories digitally hold your shares (akin to a digital locker). It might sound contrary to the Demat Account's definition. Still, the mere difference is that the Demat A/c acts as an intermediary, and it's the depository that holds your shares.
Think of it as a bank holds your money safely, a depository holds your shares and securities, but in electronic form.
- Depository Participant (DP): Your broker is registered with the depository (as DP) and gives you access. They act as a link between the depository and investors. In short, DPs help you connect with depositories (like NSDL and CSDL) and facilitate the transfer of shares.
- Trading Account: It is your gateway to the stock market that lets you place buy/sell orders.
Buying/Selling Securities On A Demat Account
Here's what goes on when you place a buy order for a stock:
- You place the order via your trading platform (linked to your Demat account).
- The broker sends your order to the stock exchange.
- If your order is matched, the trade is executed.
- On T+1 day (1 trading day after execution), shares are credited to your Demat account.
- You can now view them in your holdings within the account.
Similarly, when you want to sell shares;
- You place a sell order via the trading account.
- If it's executed, the matching number of shares is debited from your Demat account.
- On "T+1" day, money is credited to your linked bank account.
Settlement Process
India follows a T+0 settlement cycle:
- "T" is the trading day.
- "+1" means settlement (transfer of shares/money) happens one working day later.
- So, if you buy shares on Monday, they'll reflect in your Demat account on Tuesday. At that point, the cycle is T+1. Following any public holiday, the settlement happens on the next day.
Step-by-Step Guide: How to Use a Demat Account to Invest
If you are thinking about how to use a Demat account for trading in India, then this guide will explain in detail:
Step 1: Link Demat A/C, Trading Account, And Your Bank Account
Before having a Demat account, you also need to have a trading account and a bank account.
Think of it like this:
- Trading account - Where you place orders
- Demat account - Where your shares are stored (basically a place to view share holdings)
- Bank account - Where money is added/withdrawn.
Step 2: Log In To Your Broker's Platform
You can log in to your broker's platform (via the app) with your username, password, and possibly OTP for verification purposes.
Step 3: Search For A Stock Or Bond
Go to the "Search" bar and type any stock or asset you wish to invest in. For example, TATA Motors, Adani Ports, Parag Parikh Mutual Fund, etc.
Step 4: Place A Buy Order
Once you decide on the asset, choose how many shares or units you want.
Then, select the order type - Market Order (buy at current price) or Limit Order (set your price).
And, confirm and place the order.
Step 5: Trade Is Processed
With the order placed and amount debited from your bank account, the shares are credited to your Demat A/c by the next trading day (T+1).
Step 6: Track Your Holdings
Alternatively, you can view your recent transactions, order purchases on your "Holdings" or "View my Portfolio" section.
Key Terms You'll See While Using a Demat Account
When using your Demat account, you might come across multiple terms that may seem unfamiliar. But they are equally important!
Here's a quick guide for your reference:
| Terms | What does it mean? |
| ISIN (International Securities Identification Number) | A unique 12-digit code assigned to every security (like a stock's Aadhaar number). You'll mostly see this in statements. |
| Demat | Demat refers to Dematerialisation. It is a process of storing your securities in digital form, as mandated for all stocks. |
| DP ID | This is the ID of your Depository Participant (your broker). It identifies the intermediary through which you hold your Demat account. |
| Demat Acc Number/BOID | Your Beneficial Owner ID (or BOID) is a unique 16-digit number that identifies your Demat account. You'll always see them in your Demat report. |
| DDPI | A one-time consent form that allows your broker to debit securities from your Demat account for settlement when you sell or pledge shares.
DDPI has replaced the old POA (Power of Attorney). |
| TPIN (eDIS) | A 6-digit transaction PIN sent by the depository (CDSL/NSDL) that you use to authorize the sale of shares online. It ensures extra security when selling.
Think of it as the UPI PIN you enter when making a payment. |
| Depository | It is a digital warehouse for all your shares and securities. In India, we have two depositories: NSDL and CDSL. Your broker is connected to one of these. |
| Trading ID | The Trading ID is primarily used for equity trades executed. It is necessary for trading in stocks and is hence different from DP ID. |
Conclusion
Owning a Demat account is one thing, and knowing how to use it is another. While using it, you'll often see terms like DP ID, BO ID, Depository, ISIN, TPIN, and others. They might sound technical, but they're crucial for executing trades. Thus, having a basic understanding of these will help you invest wisely and avoid common errors.
