What is a demat account and how to choose one?

Long ago when most of us were in liquid form, shares were traded in hard form i.e. when one bought some shares from the market, certificates were issued. Think about a portfolio with hundreds of shares of hundreds of company. You probably would have to buy a small office space to store all the certificates :-). In a nutshell shares in hard form were an headache. To expedite share trading and enhance the storage quality of information, SEBI and the stock exchanges decided to issue the shares in electronic form. What a relief?

In order to buy and sell shares electronically, one needs to have a demat account. Demat stands for de materialization of shares.



How can one open a demat account?

To open a demat account, you need to hunt for a DP. DP is a depository participant with the stock exchanges. Some well know DP's are sharekhan, kotak, icici securities, etc. The DP interfaces with the exchanges to sell and buy shares on your behalf.

What will you need to open a demat account?

All you will need is a bank account, photo id, address proof and a PAN number.

Which DP to choose?

This is a very important question, which people usually neglect.

First, consider the DP to be the guardian of your wealth(invested in shares). If a DP goes down the drain, your wealth goes down the drain. SEBI doesn't provide 100% insurance for your wealth with the concerned DP. Therefore, one needs to look for a DP, which has demonstrated integrity and transparency over the years.

Second, if you are geo mobile you need to have an account with a DP, which has branches throughout the country(at least in all the major towns). Say you live in kolkata and have an account there. You then get relocated to say Nainital, where your DP doesn't have a branch. One fine morning you discover that you need to update some information(through the client master form) with your DP, by visiting its branch. What do you do? Eat a combiflame?

Third, you need to look at the brokerage charges specially if you are a trader and not an investor. Well a trader is a person who buys and sells shares frequently. Probably a number of times in a day(intra day trading). An investor is a dude, who buys and goes to sleep. Wakes up, sells his shares and makes huge profits. I am not saying that a trader won't make profits. So if you are a trader, you would be better off sticking to a DP with low brokerage charges(like a India Infoline). It is upto you to draw a line between a well established DP like a sharekhan(which charges more than India Infoline) and newbie like India Infoline. I have my account with sharekhan, because I sleep a lot :-)

Finally, customer service provided by the DP should be brought into consideration. It always helps when you are dealing with people(on the other end of the phone), who seem to be intelligent. After all you want your money to be in the right hands. You can decided between DP's by calling up their respective customer care numbers, seeking information. You will get an idea on who is what!!!

What else?

Please note that while you are in the process of opening a Demat account, please read the agreement between the DP and you at least thrice. Nobody wants shocks when it comes to money.