Choosing a Broker and opening Demat Accounts

What is a trading account?

As said in the previous lesson, Your Demat account is merely an account which keeps track of which shares or equities you have bought and you currently hold in your portfolio. So there is not much to do as far as ‘operating’ demat account is concerned.

TRADING ACCOUNT

Some of the beginners do not understand relationship between Share Trading account and Demat Account. This short lesson will explain the relationship between Demat account, trading Account and your Bank Account. We will also see how many trading or Demat account you can have in total.

  • Trading account is an interface between your Bank account and your Demat account. To buy shares, the first step is to transfer money from your bank account to trading account. For example , if you want to buy 100 shares at Rs 50 , you have to transfer Rs 5000 from your bank account to the trading account.
  • The shares that you buy will be stored in the demat account.
  • When you sell, your trading account takes back the shares from your Demat account and Sells them in Stock Market and get back the money.
  • If you want your money back into your bank account, you have to give a request online to the broker to transfer it to Bank account. The money gets credited in your bank account in 2 or 3 working days.
  • Just as every person is allowed to open as many savings account as he likes, there are no restrictions of the number of Demat Accounts a person can have. You can have any number of demat accounts.

SELECTING A DEMAT AND TRADING ACCOUNT

The key criteria for selecting these accounts are:

1. Your purpose/usage. In short, how frequently are you going to buy/sell and is it intraday or delivery based. You may have to choose the Broker whose charges are lowest according to your transaction style.

2. Look at a complete solution and not just one individual product like a demat account. After all, the money in the savings account will be linked to your trading account for buying/selling shares and the trading account will be linked to your demat account for storing the shares. Suppose you have a Savings account with Bank A, and the trading account with Broker B and Broker B trading account does not have a partnering arrangement with Bank A, you will be forced to open a new savings account with a bank which has partnering arrangement with broker B. Usually, most non-bank brokerages have tie-ups with the popular banks for savings bank accounts and demat accounts, but brokerages in a banking group company may have only the same bank as its partner.

3. Think long term. In case you have got yourself a demat account and you have existing shares in it and you want to move to another demat account, transfer of shares is chargeable. Brokers may charge based on number of shares or amount worth or anything. Please find out what this amount is, in case you are ever tired of bad service and you want to change the demat account. These transfer rates are never mentioned anywhere.

4. Technology. Some online stock brokers do a great job in making sure that their clients can always access their accounts, and in turn buy and sell as quickly as possible. But on the other side of things, not all brokers run this smoothly. Due to excess demands on the system, some brokers have a slower load time than others. In fact, this can lead to the server becoming bogged down. This is not common as it once was, but still this can happen.

5. Service. With the demand increasing on discount stock brokers, it is common for errors to occur from time to time. Hopefully this never happens to you, but you never know what the future holds. If you notice a mistake on your account, it is important that you contact the customer support team right away. This will help to ensure that you get the issue worked out before it causes a snowball effect on your account. In most cases, the broker you are working with will be apologetic for the mistake, and will do whatever it takes to get the issue resolved within a matter of minutes. Also, Gauge the level of personal service that a stockbroker provides as a final step in the selection process. Every investor should be assigned a specific broker or representative to contact at any time.

CONCLUSION

Hope you are now clear about demat and trading accounts and about how to choose an account.Shopping around for your broker is a good idea.

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What are Demat accounts?

WHAT IS A DEMAT ACCOUNT?

Demat refers to a dematerialized account.

Demat is very similar to your savings bank account. You have to open an account with a bank if you want to save your money, make cheque payments etc. Similarly, you open a demat account if you want to buy or sell stocks. So it is just like a bank account where actual money is replaced by shares.

A  ‘dematerialised’ account holds shares in electronic form, saving you the bother of holding shares in paper form. Possessing a demat account is now a prerequisite for stock market investments.

so, while your bank account keeps your money safe and transfers it from account to account according to your instructions without bothering you , your demat account keeps your shares safe and transfers it to the next owner when you sell it.

WHO PROVIDES THE SERVICE?

Demat services are provided by banks, financial institutions and stock broking houses. The broking houses in such cases also act as DPs (depository participants) intermediating between the depositories — CDSL or NSDL and the investor. To open a demat account, you have to make an application to a DP and submit required documents. Once you have a demat account to your name, you can open a trading account with a broker of your choice.

The shares bought and sold by you will be reflected in your demat account. Any previously held physical share can also be dematerialised and transferred to the account.The DP, at regular intervals, would provide you with an account statement showing the balance of shares in your demat account and transactions during a period.

In short, to start trading in shares you have to open two accounts-

1. A trading account -with the broker and
2.A de-mat account – Either you choose a bank/financial institution or a stock broker who could provide you the DP services.

CHARGES

The fees charged for DP services differ across the industry. Though the rates change, the charges normally go under the following heads:

1.Account opening fee
2.Annual maintenance fee
3.Transaction fee
Besides the above, depository participants also charge service tax as applicable.

DOCUMENTS REQUIRED

For opening a demat account one needs to provide a set of documents to the agent. They are:

1.Duly completed account opening form and passport size photos;
2.A copy of PAN card as proof of identity;
3.Personalised cheque/Copy of the bank passbook
4.A copy of passport/voter ID/ ration card as a proof of address
5.Signing of the DP-investor agreement.

On giving the above papers, the agent would complete the other formalities with the depository and facilitate opening of the account. You would then be given a unique account number (BO ID- Beneficiary Owner Identity), which would serve as a reference number for all further transactions.

A set of delivery instruction (DI) slips will be give to you from the DP. This is almost similar to he cheque book you get when you open your bank account. A DI slip has to be filled and sent to the DP on every delivery (sale of shares) you make. DI slip is an instruction to the DP to debit your account and credit the broker’s account with the specific stock.

Take note that the DI instruction has to reach the DP the very next day after the sale, failing which the securities won’t reach the broker and hence the exchange. This could result in auction of the security.

When you open a demat account with your stockbroker, you also sign and deliver a standing instruction for delivery of stocks that you sell.Hence, the broker handles the delivery system and you need not worry about all this.

CONCLUSION

With that, we end our discussion about De-mat accounts.More about the topic in our next lesson.

Bye for now !!

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