Many people make a good profit while investing in stock market by trading in stocks or shares of a company. In the recent past, many of your friends probably would have spoken about investing. Investing is a very good habit and should be practiced with caution. And while this is a good source of secondary income (or primary for some people who choose to do so), if you are wondering what it is all about how you could begin your investing journey, then read on to take your first step on a Demat Account.
To be able to buy or sell stocks in the stock market, you need to have two types of accounts: a Demat or dematerialized account and a trading account. The trading account is the one that allows you to buy and sell stocks. And as the stocks are bought or sold, the final status of the holding needs to be updated in an account known as Demat or Dematerialized account. It is done via updating the electronic copy of stocks certificates (as the stocks are issued by the company) in the account. Today, with the tap of a few buttons on your smartphone and submission of some personal information documents, you can quickly open free Demat account.
By opening a free demat account, you will have one account with the stockbroker (trading account) and another with the depository services (usually CDSL or NSDL). To be able to trade stocks on the stock exchange (NSE or BSE), you need to have both accounts.
To understand this better, let us consider the 3 accounts from which transactions happen:
- Your bank accounts, from which the money is debited or credited, as the case may be.
- The money moves from the bank account to the trading account. The trading account is then used to place an order to either buy or sell the stocks.
- Once the order is executed, the Demat account is updated with the record of the stocks.
You buy stocks (an asset) with the money. Therefore, the money moves from the bank account to the trading account and ultimately to the seller of the stock. Because you have bought stocks, you now own them. Therefore, they are deposited in your Demat account.
The good news is, today, you can easily open a free Demat account within a couple of minutes. You get both the accounts, as the stockbrokers are an intermediary licensed to issue and link the accounts for seamless transactions. You just need 3 things:
- A PAN (permanent account number) number. If you don’t have one, you can apply here.
- Your Aadhaar number needs to be linked to your phone number. If you have not done so, then please visit an Aadhaar Seva Kendra near your house.
- You should have a bank account, ideally a savings bank account, in any one of the nationalized banks.
If you have these 3 prerequisites, then you are eligible to open a trading and Demat account. You can complete the process online on a stockbroker’s website. Usually, the process is easy and designed in a do-it-yourself fashion. Brokers these days don’t charge brokerage fees, whereas the depositor charges per transaction.