India no longer uses the traditional approach of trading shares through paper-based certificates. According to the SEBI guidelines, you must open a Demat account and link it with your PAN card to buy or sell securities in the market. It lets you buy or sell shares with a few clicks. When you purchase a share using your online trading account, it gets stored in your Demat account in digital form. Similarly, when you sell a share, it gets deducted from your Demat account.
Therefore, a Demat account is mandatory for investing or trading in the Indian financial market. However, you will also need a trading account connected with your bank account to engage in share trading. Let’s explore what a Demat account is, its use, and how to buy and sell securities using a Demat account.
What is a Demat Account?
A Demat account stands for a dematerialised account, a digital account that you can use to hold the shares you buy through BSE and NSE. National Securities Depository Limited (NSDL) and Central Depository Services Limited (CDSL) are the two depositories responsible for managing all trading transactions in the country.
One of the major Demat account benefits is that it eliminates the need to store and carry paper certificates for purchased shares. You can hold your shares in a Demat account, including equities, stocks, bonds, mutual funds, government securities, etc.
The Need for a Trading Account
A trading account is essential for seamless participation in financial markets. It provides a platform to buy, sell, and manage various assets such as stocks, commodities, and currencies. This account acts as a bridge between you and the market, enabling you to execute trades, monitor investments, and capitalise on opportunities. Whether you’re a seasoned investor or just starting, a trading account is your gateway to actively engaging in the dynamic world of trading and investment.
The Expenditure of Stock Trading in India
According to the stock broking firm, you must pay account opening charges for the Demat and trading account. Some brokers also provide the facility of a Demat-cum-trading account. However, some waive these charges to attract new investors. After that, they may charge annual maintenance charges to maintain the account, which many brokers waive for the first year or so. In addition, you must pay a small brokerage fee each time you purchase or sell shares online using the account.
So, consider these charges when opening a Demat and trading account since these costs may impact your Demat account benefits and profits.
Getting Prepared to Buy or Sell Securities Using a Demat Account
To start trading securities online, you must stay prepared with the following:
Obtain a PAN Card
A PAN card gives you a Permanent Account Number, which is mandatory to buy securities in the stock market. The Income Tax Division issues these cards online or through an agent. Once you obtain your PAN, you become eligible to open a Demat account.
Open a Demat and Trading Account Online
NSDL and CDSL are national depositories that maintain and manage the securities data accounts. You may approach a Depository Participant or brokerage firm directly to open a Demat and trading account. The account opening process is easier and faster with an online broker. Follow these steps to open a Demat account online:
- Select a Depository Participant.
- Submit an online Demat account opening form.
- Fulfil KYC norms.
- Submit the required documents, such as your identity, address, and income proof.
- Complete the verification process.
- Sign the agreement copies.
- Get an ID number.
In the open stock market, you can select the stocks you want to purchase or sell online. A Demat account stores your purchased shares until you are ready to sell them for a profit.
Connect Your Bank Account
You must connect your bank account with your trading account to trade securities online. Therefore, if you don’t already have a bank account, open one immediately to start trading. As soon as it is active, transfer the amount you want to invest from your bank account to the trading account.
Once all accounts are set up, access an online trading platform to identify the securities you want to purchase and place a buy order. The purchased securities will appear in your Demat account, depending on the trade type.
Steps to Buy Securities Using a Demat Account
- Log in to your Demat account
- Browse through the available securities
- Select the lucrative ones
- Place a buy order
- The broker will instruct the DP to debit the amount and credit the purchased shares in your Demat account.
Steps to Sell Securities Using a Demat Account
The ultimate goal of purchasing securities is to sell them eventually to make a profit. Keep a watch on the market and aim at selling the shares at the highest price possible. However, sometimes the price may go so low that you want to sell them to avoid further loss. Whatever the reason you want to sell the securities, you can log in to your Demat and trading account and place a sell order at the current share price. These are the steps to follow:
- Log in to your Demat account.
- Select the shares you want to sell
- Place a sell order
- The broker will instruct the DP to debit the shares and credit the transaction amount in your Demat account.
Placing a stop-loss or limit order is also a good strategy to exit the trade at a particular price. You may also specify the number of securities you want to sell. Once the sell order hits, you may exit the investment, and the loss or profit will appear in your Demat account.
Now that you know what is Demat account is and what is the use of it, you can trade online successfully and generate substantial income. Open a Demat account through a reputable depository participant to have an affordable and hassle-free trading experience.