In the last decade, the Indian capital markets have witnessed stellar growth. With improved returns from equity investments and reduced fixed deposit interest rates, experts predict that the stock market growth story may continue in the long run. For new investors who are just starting off with investing in the stock markets, it is important to first learn the basics of investing in stocks, bonds, etc. This includes knowing some technicalities like fund transfer, Demat account functioning, etc.
For investors who want to understand the mechanics of a Demat account and how to transfer funds from a Demat account to a bank account, here are all the important details.
What is a Demat account and why is it needed?
Meaning of Demat account
Just like a bank account acts as a safe house of cash in intangible form, a Demat account helps investors in safekeeping securities in electronic or digital form. Since the assets are held in a Demat account in digital form, an investor can trade in these quickly and at any time during trading hours. New investors must register or apply for a Demat account along with a trading account. Trading account helps investors in executing the sale or purchase of securities that are held in a Demat account.
Why is a Demat account needed?
A Demat account holds shares, securities, bonds, mutual funds and other assets in a dematerialised form. Dematerialisation allows quick investment or exit in capital markets and all transactions can be carried out online.
With a Demat account, an investor can easily monitor and trade in securities seamlessly. While dealing in securities, an investor needs to have a Demat account and also a trading account. A trading account acts as a bridge between the investor’s Demat and bank account. A trading account stores the cash flow details (debit or credit) of all transactions, whereas a Demat account acts as a storehouse of securities.
How does a Demat account function?
If an investor or trader wants to buy or sell a stock, a depository participant will place the same request in his/her trading account with the stock exchange. For a buy request, the stock exchange will identify a seller who may have placed an order to sell a certain number of shares. After identifying a seller, the depository will further issue orders to the clearance houses for debiting shares from the seller’s Demat account and crediting them to the buyer. The sale proceeds will then be credited to the trading account that is linked to the seller’s Demat account in T+2 days after the sale of securities. As a last step, the funds can be transferred to the seller’s bank account from his/her trading account.
Steps for funds transfer from Demat to bank account
Here are the steps that can be followed for transferring funds from a Demat account to a bank account:
- A user must log into his/her trading account that is linked to the Demat account.
- Go to the ‘Funds’ or ‘Accounts’ section.
- Select the option of withdrawal of funds that may be available from the sales proceeds of old/existing securities.
- User must then enter the amount to be transferred to a bank account for withdrawal.
- Once the user provides correct bank account details, the system will ask for trading password for initiating the transfer.
- The funds will then be credited to the user’s bank account.
Factors to note while transferring funds from Demat account to bank account
Here are some of the important points to note while transferring funds from a Demat account to a bank account:
- As per the steps mentioned above, one can note that no funds can be transferred directly from one’s Demat account to a bank account. This is because all transfers to a bank account can be done only through the trading account since it acts as an interface between the Demat and the bank account.
- It is also important to remember that only such an amount can be transferred to a bank account that is earned from the sale of securities or the funds that you have added to your demat account..
- The available fund limit in a user account should not be confused with the amount of funds that one is authorised to transfer. Brokers offer trading leverage to investors by lending a certain amount of money. This depends on the existing composition of securities in an investor’s Demat account. Such an amount is mentioned in one’s account, but it cannot be transferred to one’s bank account.
- Brokers generally allow all major payment methods, such as online transfers through NEFT, IMPS, UPI, etc. Most brokers also have a similar set of steps for making such transfers.
Stock markets are attracting more investors than ever before due to rapid digitisation and smooth account opening processes. This has also resulted in increased knowledge about stock market functionalities among the masses. With easy transactions and fund transfer processes, it is no longer difficult for a common man to trade in stocks.
Yes, both trading and Demat accounts are needed for stock market investments. However, those who want to perform intraday trading need not have a Demat account, as it does not involve the delivery of securities.
No, a trading account is essential for stock market transactions.
To open a Demat account, you can download the Finity app on your smartphone. The app has an end-to-end online process of KYC and account opening for stock investment purposes.
Most brokers do not levy any charges for fund transfer from Demat account to bank account. However, an investor must clarify the specifics with his/her broker.
The Demat account opening charges could differ across brokers and broking platforms. Some may even charge zero fees for Demat account opening.