Capitalising on the Stock Market through a Demat Account

If there ever was a good time to open demat account, it’s now. 140 million trading and demat accounts were opened by the end of 2023. This is a record number and the active participation is fuelled by the phenomenal rise in India’s stock indices. Indian stock markets are in a phase perhaps similar to America in the 1950s when consumerism was at its peak. Maybe it’s time to define the ‘Indian way of life’ now!

Why is there a race to open demat accounts in India?

Even if you aren’t interested in the Indian stock market, the news about the latter must have trickled into your ears somehow. It’s everywhere! It’s breaking all previous records and it doesn’t look like it’ll run out of steam anytime soon. Everyone wants a piece of the Indian capital market. Qualified institutional buyers, foreign portfolio investors, retail investors or the common Indian person – everyone! The latter is increasingly searching online for a good stock market app and easy to capitalise on the market.

Here’s why everyone’s so eager to invest in the Indian stock market: 

  • Index performance: India’s benchmark index Sensex saw a steep 20% rise in the last 12 months.
  • Capital infusion: 21 IPOs alone raised $678 million in January 2024. The figure was a mere $17 million a year ago. 
  • IPO boom: There were 57 mainboard IPOs last year. Such a listing frenzy has been rare.
  • Nifty returns: Nifty50 has delivered a whopping 22% return in 2023. 
  • Market growth: India’s stock market has overtaken Hong Kong to be the 4th most powerful stock market in the world. The combined share value of Indian indices was $4.33 trillion in January 2024.
  • Rising per capita income: India’s per capita income is rising. It is set to reach $4000 by 2030.
  • Active Internet users: The digital footprint in India is rising with about 700 million active users in 2023.

The reasons mentioned above combined with a rise in India’s affluent class is fuelling a financial revolution. Indians want to open demat accounts like never before. They want to ride this wave and compound their investment in no time.

What is a demat account?

So by now, you know what’s fuelling the interest in trading and investment in Indian capital markets. Now it’s time to know how it works. The demat account is at the base of the market. It is a must for everyone who wants to invest in stocks, futures, options, commodities, ETFs, and mutual funds. 

The Demat account is an electronic account that stores your shares in digital form. Earlier, stock market participants had a physical certificate of their shares. It contained the number of shares held by investors and the paperwork was really cumbersome. There were frequent problems during the transfer of shares and there was always the risk of theft and damage. 

Demat, shortened for dematerialisation, is the way you convert your physical share certificate into digitised chunks. The Demat account has to be opened with a depository participant or securities depository. 

There are two securities depositories in India – 

  • NSDL (National Securities Depositories Limited) and 
  • CSDL (Central Securities Depositories Limited)

These depositories store your financial securities which include shares, bonds, and government treasury bills. They keep your securities safe and prevent all damages that physical share certificates are prone to. They enable quick transfer of shares and reduce paperwork burden.

How is a demat account different from a trading account?

There’s a small difference between a trading account and a demat account. While the latter is meant for storage and safekeeping of shares, the former is used to conduct trades. You buy and sell shares of a stock as well as execute futures and option orders through a trading account. 

So, the demat account stores your securities and the trading account helps you trade in those securities. The former is useful in the transfer and settlement of securities while the trading account is useful in recording the transactions. 

Another difference is in the number of participants. There are only two depository participants in India that offer demat services while there are several brokers who provide trading account services.

Specifications of demat and trading accounts

These two accounts are linked with each other and also with your bank account. To carry out trading and investment activity in the brokerage or stock market app, you first need to transfer money from your bank account into your trading account. Once the money is transferred, you can trade in all types of securities – stocks, options, commodities, and ETFs.

Technically, it is possible to have a Demat account without a trading account and vice versa. If you trade only in futures and options, you don’t need a demat account. If you apply for an IPO and just want to hold the shares for a short while, a trading account is not required. However, both these accounts are a must for those who want to trade in equities. The majority of investors open demat accounts and trading accounts together.

Key Takeaway

India’s share market is a major contributor and beneficiary of India’s growth story. Amid global headwinds and geopolitical turmoil, India is the best bet for domestic and foreign investors. It’s the best time to capitalise on the stock and indices rally. All you need is to open a demat account and start trading!

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