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Want to open a demat account? Here's what you should know

Want to open a demat account? Here's what you should know

Most financial planners advise that it is better to take the mutual fund route instead of directly via stocks if you want to invest in equity. This has not, however, prevented many retail investors from taking advantage of the upbeat stock market in the last financial year.

According to a recent report by the Economic Times, some 4.1 million fresh demat accounts were opened in the financial year ending 31 Dec 2018, exceeding the previous record of three million in 2007- 08.

If you also want to benefit from the equity potential by investing directly in shares, you can do this by opening an online brokerage or a demat account. Here's all you need to know about setting up one.

To invest online, you need a brokerage account to open any brokerage like HDFC Securities, ICICI Direct, Axis Direct, Fyers and Zerodha.

These dealers can be a discount broker or a service broker. The main difference is the range of products and services available. A discount broker only carries out trading instructions for an investor and has equity and derivatives to offer when, as a service broker, the initial public bid, mutual funds and insurance on its platform offer seamless investing possibilities. It's the service broker that supplies research reports from different stocks and different sectors.

In the recent past, if you have been bitten by the rates of IPOs, remember that it is not so seamless to invest in them as it is with discount brokers. You have to have these three– a bank account, a trading account or a demat account– in place for the investment. A demat account is a close cousin of the business account, without which the demat account is simply a digital shop for holding securities. You can invest and hold stocks, IPOs, mutual funds and even gold in a demat account via a trading account.

The Demat securities are held by the participant depository( DP). Two DPs- NSDL and Central Depository Services India Ltd( CDSL) are in existence. There are three DPs. The DP holding your demat account depends on the person with whom your broker has connected. However, the services of the two DPs are not very different.

A brokerage account can be opened online. "You can open an online account for trading and demat, but the legal authority( POA) must be physically subscribed. This can be changed in the future according to the regulatory guidelines. The Aadhaar Card is also a very important compulsory document, says Tejas Khoday, co- founder of the technology- based stock brokering firm FYERS, if you wish to open an Online Account.

3-in-1 cash flow* You transfer cash from your bank savings account to your trading account.* You can buy or sell the securities from the trading account that has its own unique ID. * In demat account the actual equity credit is displayed. The demat account shall be used as a bank for depositing shares purchased and for collecting the stocks sold. Does a trading and demat accounts have the same institution with a trading and demat and bank account?

If it's not the same entity, what happens? "To have a 3-in- account helps for seamless trading. For example, you are required to transfer the amount to a broking house when you open the ABC bank savings and demat account and the XYZ Broking house trading account. When the amount is credited, you may lose good investment opportunities and even interest on your savings account. Further, you will have many troubles if you intend to transfer shares from your Demat trading or collateral trading account," Axis Direct said in an e- mailed reply.

It helps to have the account with the same company if you buy and sell the DIS, which is like a cheque in a bank, offline. "A DIS can be prevented from signing. If you are not with the same company, you must sign and send the DIS to your DP each time so that the shares can be transferred to the broker. If the delay exists, you can also auction your shares, leading to a likely loss. When you operate with two different companies, you also get high fees," says Achin Goel, Head of Wealth Management and Bonanza Portfolio.

Charge on Demat account or share trading?

The fees and broking fees play an important role in selecting a broker like every financial service. As well as opening charges and the annual service charge, which brokers sometimes waive, the transaction charges are of paramount importance. "Be aware of the various single and recurring charges when opening a brokerage account. You must also be aware of transaction charges between brokers, which can differ greatly. For different segments, most brokers charge different fees, which can be quite confusing.

Ideally, a broker charges flat fees for all types of transactions should be selected. This helps you to concentrate on trade / investment instead of calculating your fees each time you deal, "Khoday says. Note that you are going to pay for each transaction you purchase and sell. Therefore, base your decision on whether you will trade very frequently or buy and keep investing for a longer period. Broking companies have various pricing plans on offer for equity investment( as a retail investor, investment rather than trade is advisable). For example, the purchase and sale transaction values can be at least 0.50percent of Rs25.

Choose the plan that meets your needs. The most fundamental is the plan for flat prices. The brokerage remains the same in this plan, regardless of the volume of business. The other is the price associated to the volume at which the brokerage falls as the trade volume goes above a certain threshold. It is suitable for those trading around the threshold. For instance, if the trading value is less than Rs 25 lakh in each year, the brokerage might be 0.75%, and would decrease to 0.5% of the value transacted for a higher amount.

Some also offer prepaid pricing where the customer pays the brokerage early, who in turn receive discounted prices on the transactions of brokerage. Most traders are priced based upon floating funds and trading volumes for special brokerages. Brokerage depends on the type of transaction, but does the choice of a Demat account involve a trader or an investor? "No, it doesn't. It doesn't. Everybody wants to save costs and to have a reliable experience at the end of the day, whether it's long- and short- term investors," Khoday says.

Documentation to be done for DEMAT account.

During opening of an account, one needs to sign contractual documents including a "specific "proxy for the brokers to transfere the securities for marginal purposes, settle trades and money on the client's bank account, and to recoup the amount owing to broker / dp, in addition to fill in the application forms. The PoA has the bank and demat data and has to be executed, not on behalf of its employees, on behalf of the broker. 

What you should do, One should always remember the fundamental rules for investment and aim to invest in long- term equity rather than short- term gains because it is a risky proposal. Make an informed decision and hold the shares until you have changed the reasons for buying them.

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