We have dicussed what is a Demat account, Depository, and Depository Participant in the previous article. We shall now discuss in brief how to start a demat account.
For investing directly in stock markets, having a demat account is mandatory. We can open a demat account with any one of the depository participants registered with both SEBI and anyone of the two depositories NSDL and CDSL.
Nowadays, demat accounts are provided by depository participants such as Banks, Non-Banking Financial Institutions, Stockbrokers, etc.
As far as I am concerned, it is better to open a demat account with stockbrokers as their primary source of operations is only providing the brokerage services. Banks and other financial organizations are into many services and functional operations, and the quality of service may be a little below par than that of exclusive stockbrokers.
People who are not interested in directly investing in stock markets can invest through mutual funds. There is no need for having a demat account if you want to invest in mutual fund schemes. But, you can also invest in mutual funds through demat accounts offered by some depository participants.
Types of Stockbrokers
There are two types of stockbrokers offering Demat or online brokerage accounts. Full-Service Brokers and Discount Brokers. The main difference between the two is the variety of the products and services offered.
A Discount Broker only carries out an investor’s trading instructions such as buying and selling of securities such as equity shares, bonds, and derivatives. They do not provide any research analysis or stock recommendations. You can apply to IPOs as well through the online brokerage accounts offered by some discount brokers. Zerodha, Upstox, 5 Paisa, Edelweiss are the well-known discount brokers.
A Full-Service Broker provides all the services offered by a discount broker and also offers investment options for initial public offerings (IPOs), mutual funds, insurance, research reports on various stocks and sectors. But they also charge high fees for their services compared to discount brokers. ICICI Direct, HDFC Securities, Kotak Securities, Angel Broking, Share Khan, Motilal Oswal, etc. are the top full-service brokers in India.
A small retail investor should open an account with discount brokers because most of the research analysis reports and stock recommendations would be confusing for a small retail investor who wants to invest only a part of their savings. You can also save yourself from high service charges.
Opening the accounts
For investing or trading, you need three accounts: a Bank account, a Trading account, and a Demat account.
The Trading account is meant for buying and selling securities, and it is different from a Demat account. Most people confuse the trading account with the demat account. Sometimes, I receive phone calls from stockbroker agents who do not know the basic difference between a demat account and a trading account.
A trading account is compulsory to purchase or sell securities. There is a direct link between the two accounts.
Generally, you get both trading and demat accounts from the brokers. It is better to have both demat and trading account with a single stockbroker. It is easier for you to purchase, trade, and hold securities.
Some brokerage firms are providing a 3 in 1 account with a Bank account, Trading account, and Demat account linked together.
To make it easy for you, the entire process is like this: The money from the bank account is transferred to the trading account. The securities are bought through the trading account. The purchased securities are held or saved in the demat account.
Disclaimer:
I provide the information and my views on the website only to educate new investors, stock market enthusiasts, and the common public on equity or stock market investments. Please consult your financial adviser before making any investments in the stock market. In case of any queries, you can contact me via email ID or Contact Form.
