Where are the demat accounts created? Here’s what you should know
Most financial planners advise that if you want to invest in equity, it is better to take the mutual fund route rather than do it directly via stocks. However, that hasn’t stopped scores of retail investors from wanting to take advantage of the upbeat stock market in the last financial year.
According a recent Economic Times report, about 3.76 million fresh demat accounts were opened in the financial year ending March 31, 2018, surpassing the previous record of 3 million in 2007-08. If you, too, want to gain from the potential of equity by directly investing in shares, you can do so by opening an online brokerage or a demat account. Here is everything you need to know about setting one up.
Types of brokers
To invest online, one needs a broking account which can be opened by approaching any of the brokerages such as HDFC Securities, ICICI Direct, Axis Direct, Fyers, and Zerodha.
These broking firms can either be a discount broker or a service broker. The primary difference between the two is the range of products and services that are offered. A discount broker just carries out an investor’s trading instructions and has equity and derivatives to offer, where as a service broker, in addition to what a discount broker offers, provides seamless investing options for initial public offerings (IPOs), mutual funds, and insurance on its platform. It is the service broker that comes with research reports on various stocks and sectors. Majority of the broking firms are service brokers.
If you are bitten by the returns of IPOs in the recent past, remember that investing in them is not as seamless with discount brokers as it is with full service brokers.
Opening of accounts
For investing, you need to have these three in place – a bank account, a trading account and demat account. A demat account is a close cousin of the trading account, without which the demat account is merely a store for holding securities in digital form. Through a trading account, you can invest in stocks, IPOs, mutual funds and even gold, and hold them in a demat account.
The securities in the demat account are held by the depositary participant (DP). There are two DPs – National Securities Depository Ltd (NSDL) and the Central Depository Services India Ltd (CDSL). The DP that will hold your demat account will depend on which one your broking firm has tied up with. There is not much of a difference, anyway, between the services of the two DPs.
You can open a brokerage account online. “One can open a trading and demat account online and get started but you will need to sign the Power of Attorney (POA) in physical format. This is as per the regulatory guidelines which can change in the future. Also, the Aadhaar Card is a very important mandatory document if you want to open an online account, informs Tejas Khoday, Co-Founder of FYERS, a technology-focused stock broking firm.
Fund flow in 3-in-1 account
- You transfer funds from your bank savings account to the trading account.
- From the trading account, which will have its own unique ID, one can trade, i.e., buy or sell the securities.
- The actual credit of shares is shown in the demat account. The demat account is used as a bank where shares bought are deposited, and where shares sold are taken from.
Having trading and demat accounts in one place
Does having a trading and demat account with the same institution help? What happens if it is not with the same entity?
“For seamless trading, having a 3-in-account helps. For instance, if you open a savings account and demat account with ABC Bank and trading account with XYZ Broking house, you are required to transfer the amount to the broking house. By the time the amount gets credited, there are chances that you could lose out on good investment opportunities and even on the savings account interest. Also, if you intend to transfer shares from your demat account for trading or trade against collaterals, there will be lot of hassles,” said Axis Direct in an emailed response.
Having the account with the same institution also helps if one buys and sells offline using the delivery instruction slip (DIS), which is akin to a cheque in a bank. “Signing a DIS can be avoided. If not with same entity, then you will have to sign and send the DIS every time to your DP so they can transfer the shares to the broker. In case there is a delay, then your shares can also get auctioned, causing a probable loss. Also charges become high when you operate with two different entities,” says Achin Goel, Head Of Wealth Management, Bonanza Portfolio, a financial services firm and broking house.
As with any financial service, the fees and broking charges play an important role while selecting a broker. In addition to the opening fees and the annual maintenance fee, which the brokers some times waive off, the transaction charges are most critical. “While opening a brokerage account, be aware of the various one-time and recurring charges. You also need to be aware of transaction charges which can vastly differ between brokers. Most brokers charge different fee for different segments which can be quite confusing. Ideally, you should choose a broker that charges a flat fee for all types of transactions. This helps you focus on trading/investing rather than calculating your fees every single time you transact,” says Khoday.
Do keep in mind that you will be paying for every buy and sell transaction. So, base your decision on whether you are going to trade very often or buy and stay invested for a longer duration. (As a retail investor, it is advisable to invest rather than to trade.) Broking companies have various kinds of pricing plans on offer for equity investments. For example, it can be 0.50 percent or minimum of Rs 25, on both buy and sell transaction values.
Select the plan that suits your requirement.
The most basic one is the flat pricing plan. In this plan, irrespective of the volume of the trade, the brokerage remains the same. The other is the volume-linked pricing in which the brokerage keeps coming down as volume of trade goes up above a certain limit. It suits those who trade around that threshold limit. For example, if the value of trade is less than Rs 25 lakh in a year, the brokerage could be 0.75 percent, and for a higher amount it would drop down to 0.5 percent of the value transacted. Some also offers pre-paid pricing in which the brokerage gets paid upfront by the customer, who will in turn get discounted rates on broking transactions. For traders, most brokerages offer special pricing based on floating funds and trading volume.
The brokerage varies depending on the type of transactions, but does being a trader or an investor matter while choosing a demat account? “No, it doesn’t. At the end of the day, everyone is looking for a cost saving and reliable experience regardless of whether they are long-term or short-term investors,” says Khoday.
While opening an account, in addition to filling up the application forms, one needs to sign on the agreement papers including a ‘specific’ power of attorney (PoA) to the broker for transfer of securities for margin purposes, for settlement of trades and funds from the client’s bank account and for recovering the amount due to broker/DP. The PoA carries the bank and the demat details and must be executed in the name of the broker and not in that of its employee
What you should do
One should always remember the basic rules of investing and look to invest in equity for the long-term and not for the short-term gains as it’s a risky proposition. Make an informed decision and hold on to the shares until the reasons for which you had bought them have changed.
Hopefully my knowledge and Golden rules will improve your trading.
I recommend opening a Demat and Trading account with only Discount Broker like Zerodha, which have good history and proven records, It provides good Customer support, Softwares, and Indicators for Professional trading, obviously you will save around 3-5% of the money on your brokerage.
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- Where are the demat accounts created? Here’s what you should know,