A demat account is defined as a virtual space for all dematerialised shares invested in. It indicates the trading positions taken by the investor or his broker, along with the dates of trades. Since the dematerialisation of shares, investing in shares has moved to the electronic space.
Trades are executed at the click of a button, and the markets have been widened. The investing community can now invest in a wide variety of asset classes, around the globe.
Opening an online demat account is a simple process of choosing the depository with which the account has to be opened. India has two main depositories- NSDL (National Securities and Depository Ltd.) and CDSL (Central Depository Services Ltd). Once the depository has been chosen, the investor has to approach a brokerage or financial services firm, who would assist in the further process. These brokerage firm assist investors on how to open demat account. Simple KYC formalities need to be completed, such as filling an account opening form and providing ID proof for obtaining an online demat account.
Investors can also open multiple demat accounts, for easier trading. A particular account can be designated to a broker, while another can be designated to another broker. This is a method for obtaining expertise in trades and also saving high brokerage costs, by the concentration of all trades in one account.
Nowadays, linking of accounts is essential to streamline the trading process. As the investment is online, payments are online, and reflection of position is electronic; various accounts have to be linked to make the whole process smooth.
Brokerage firms provide the services of linking of the three accounts (mentioned below), to provide a seamless trading experience to investors. Investors should ideally have a designated broker to handle end to end transactions. An investor requires his broker’s help in a variety of activities: opening a trading account, a demat account, linking the accounts digitally, executing trades and also for handling grievances and problems related to trading in shares.
Stock trading involves following three accounts
For buying or selling a share electronically, a trading account has to be opened with a stockbroker or broking firm. Since the physical trading of shares was discontinued, trading accounts were made mandatory to begin the investment process. Every investor gets a unique trading ID on opening a trading account. This ID is the identification for the investor and can be quoted to depositories, brokers and other parties in course of trading.
A demat account has to be opened by the investor with the depository for the purpose of storage of online shares bought. A demat account depicts the history and updated information on the trades conducted by the broker/ investor. It shows the number of shares held, the price at which shares were bought or sold, and at what price, along with the dates of the transactions. It is similar to a bank statement, which depicts the debits and credits in a customer’s bank account during a specific time frame, for example, a month.
For the electronic transfer of shares between participants in the secondary capital markets, funds flow has also been simplified for faster trading. Funds are transferred by electronic/ online modes, and for this purpose, investors must have a bank account for trading. Funds are transferred through internet banking, or through cards.
Process for Linking accounts:
Brokerage firms which aid investors in the opening of trading and demat accounts, also advise them on the linking of the accounts. Linkages are important to save time on repeated transactions.
As the trading process has changed from the traditional physical trade to the current electronic trade, a streamlining of the process is essential for an error-free and risk-free experience for both the buyers and sellers.
Connecting the three accounts is a process which involves the competency of the broking firm employed by the investor/ trader. ‘Share allocation’ is the process by which an investor can link the trading account to the demat account. It is a simple process done electronically and does not take much time to complete. Any share purchases made, when allocated enable the trader to view the latest demat holdings.
A bank account can be linked to the trading and demat accounts by quoting the respective account IDs to the bank. By completing the bank’s process, the account can then be linked to the trading and demat accounts of the investors.
Brokers advise investors to deposit a certain amount in the bank account and then transfer it to the trading account. Upon this linkage, shares, when bought and sold, get reflected in the demat account, while the money in trading account gets used for funds transfer. The choice of broking agency and the relationship thereof plays an important role in the simplicity and speed of the trading process for investors.