Basics of a Demat Account

Dematerialised account or demat account as known in common parlance is a digital platform for buying and selling shares and other financial instruments. Prior to the introduction of demat account securities were held by investors in the form of physical certificates. However, technological advancements and the need for a more convenient method for trading led to the introduction of demat accounts in 1996. Demat accounts have now been made mandatory and every investor needs to trade through demat accounts only. Any shares held in physical form need to be transferred to demat account by 1st April 2019.

How to open a demat account?

In the electronic trading platform, the shares are stored in the depository system through CDSL( Central Depositories Securities Limited) or NSDL( National Securities Depository Limited). In order to open a demat account an investor needs to approach a depository participant (DP), such as a broking firm, sub-broker or a bank, who are intermediaries between the investors and the depository. Once you register with any of the DPs and complete the verification process by submitting your ID and address proof, you will be given a unique login ID and transaction password. This demat account will also be linked to your bank account of which you have submitted details for any trading transactions you wish to carry out.

Some of the terms common terms to be familiar with before you get started with your demat account:

1) Settlement
When you execute the purchase of securities the same is delivered in your account against the payment made by you. The settlement cycle in India is T+2 days, where T is the trading day.

2) Intraday trading
When you buy or sell the securities on the same day before the trading session ends, it is known as intraday trading.

3) Margin money
When you want to buy more shares than you can use the facility of margin money from the broker and buy more securities.

4) Market Order
When you wish to buy or sell a security at the current market price, then you have to place a market order. For example, the current market price of XYZ Company is Rs 120 and you wish to buy it at this price. You will place a market order for the desired quantity and your order will be executed instantaneously.

5) Limit Order
When you wish to buy or sell a security at a specific price, then you place a limit order and whenever the price is hit, your order will be executed. For example, you wish to buy the shares of a company at Rs 150 and the current market price id Rs 160. Whenever the share price falls to Rs 150, your trade will be executed.

6) Stop Loss Order
A stop loss order is placed to minimize your losses if the price movement of the security is not as per your expectations. For example, you bought shares of a company at Rs 200 and anticipated the price to go up to Rs 220. However, market movements are unpredictable. In order to minimize your risk, you can put a stop loss order of Rs 195 and so if the price falls down to Rs 195 then your trade would be executed and your losses would be limited to Rs 5 per share.

7) Cash and Carry (CNC)
Cash and carry is a delivery based trade. This type of order is to use for either taking delivery of shares in your demat account or selling shares from your demat account. If you place this type of order and buy shares, then the e-shares are delivered in your account and the entire amount is deducted from your account for the execution of the trade. The settlement process is completed in T+2 trading day.

Margin Intraday Square-off (MIS)

This type of trade order is used for intraday trading, which means that whatever position you take, it will be squared off(closed) on the same trading day either by you or forcefully by the broker at the end of the trade. The advantage of MIS trading is that it allows you to buy larger quantities of shares by paying just the margin money and not the entire capital amount. This type of order is used for both shares and F&O trades.
There are many other terms related to stock market trading, but these are few basic concepts to get started.

Originally Written by: Rupanjali Mitra Basu