Demat or DP account is simply an account where investors’ holdings are kept in electronic format instead of the investor taking physical possession of the share certificates. You can get more knowledge about demat account, its benefits, and the charges in our knowledge base but what is really important for investors to understand is that trading in shares in India is now mandatorily in dematerialized (demat) form. This also applies on IPO investments. As a result, apart from knowing how to spot good IPOs, it is important to figure out how crucial a cost-effective or free demat account is for your profits.
Depending on an investor’s portfolio and frequency of trading, demat charges can become substantial costs and eat into profits. As a result, investors should consider opening the most competitive or free demat account. Thankfully, several brokerage houses and banks offer free demat accounts to attract investors nowadays. What’s more, you can easily open a demat account online by just sharing your Aadhar number.
Costs you save in a free demat account
First off, here are the major costs associated with trading in demat accounts.
Account opening charges – There may or may not be demat account opening charges. There is also no industry-accepted figure for this one-time charge. Some companies can charge as much as INR1,000 for opening new demat account while some may completely waive off this charge. Most companies charge around INR250 for opening a new account while most discount brokers are happy to open free demat account.
Annual Maintenance Charge (AMC) – This is usually the biggest cost for investors who are not traders. Typically charged on an annual basis but some companies have quarterly and six-month plans too. Costs are generally around INR400 but again, there are companies which charge as high as INR1,000 annually for maintaining your demat account. For frequent traders, this one-time cost gets divided as the frequency of trading increases and may actually be insignificant for some. However, AMC charges become too high a component for the investor who buys or sells something just once or twice a month. Once again, look for best quotes in this department, especially if you are in the ‘buy and forget’ category. SEBI has taken a wonderful initiative by allowing AMC-free Basic Services Demat Account (BSDA) for small investors who have stocks worth less than INR50,000 in their accounts.
Demat transaction charges – This is the charge an investor has to pay every time he/she buys or sells shares in the demat form. There are number of variations here and while a flat fee is generally levied, some companies are known to charge a percentage of the transaction value, subject to a minimum amount which is typically around INR20-40. Most brokerage houses charge for both buy and sell transactions but some charge only on sell side.
In addition to these main charges, there are costs for other transactions such as dematerialization, rematerialization and pledge of shares as well as failed or rejected instructions. However, these are not the regular transactions for either traders or investors.
As mentioned above, there are charges at every step and thus, it becomes important for investors to opt for the plan which suits their investment strategy and frequency. In stock market investing, one need to have a share trading account which has separate expenses and demat charges are always additional costs.
Note: If you plan to play in Futures & Options (F&O) derivatives, you don’t need a demat account.
Demat accounts are typically opened by banks, Depository Participants (DPs) or discount brokers. Services offered by these parties vary significantly depending on ease of doing business, transferring money from bank to trading account but generally costs are lower with discount brokers. From time to time, brokerage houses launch schemes waiving off account opening and AMC charges.
Are you stuck with a high-cost broker? If yes, it makes sense to ditch your old broker and open a free demat account. As we mentioned above, getting a Basic Services Demat Account (BSDA) is another great option. In case you are from ‘what is BSDA?’ camp, head to this page for more information about the advantages and benefits of this account. If you are interested in opening a free demat account or a BSDA, we can help. Just enter your details here and we will get in touch with you.