What is a Demat account?
A Demat account is primarily used to electronically hold securities and shares. The concept was first introduced in the country in the year 1996 as an alternative to physical share certificates.
A Demat account not only makes share trading quick and easy, but also eliminates all of the risks and problems associated with physical share certificates.
You can use a Demat account to store a wide variety of investments such as equity shares, ETFs, bonds, debt securities, mutual funds, and government securities among others. In India, possession of a Demat account is mandatory if you wish to invest in the stock market.
A Demat account is also known as Dematerialized account. In other words, converting or dematerializing your physical shares in the electronic format is known as holding a Demat Account.
Demat account is used to hold the shares and securities of publicly traded companies in an electronic form. With a Demat account, you can hold a wide variety of investments such as bonds, equity shares, government securities, mutual funds, and exchange traded funds.
Similar to a bank account, a Demat account is either credited or debited each time you buy or sell shares of a company.
It not only eliminates unnecessary paperwork, but also helps streamline the process of share trading. All of the Demat accounts in India are maintained by two organizations, namely National Securities Depository Limited (NSDL) and Central Depository Services Limited (CDSL).
How does Demat Account Work?
Buying of stocks in the share market can be done only through a trading account. Meanwhile, a Demat account is used to hold the shares bought through the trading account. Therefore, in order to realize the full potential of a Demat account, it is imperative to link it with a trading account. The following process will show you exactly how a Demat account works.
- When you place an order, say a ‘buy’ order, on your trading platform, a ‘buy’ request is forwarded by your depository participant to the stock exchange.
- The stock exchange then matches your ‘buy’ request with a similar ‘sell’ request and sends an order to the clearance houses.
- The clearance houses then settle the trade by debiting the specific number of shares from the seller’s Demat account and crediting it to your account at the close of the share market.
Features and Benefits of Demat Account
By opening a Demat account, you enjoy access to a number of useful features. Here are some of the most important ones.
- Share transfer: Transferring your shares is extremely easy with a Demat account. Send in a duly signed Delivery Instruction Slip (DIS) to your depository participant to transfer your shares.
- Loan collateral: You can pledge the securities you hold in a Demat account and use them as collateral for securing a loan from a financial institution.
- Temporary freeze: You can temporarily freeze your Demat account for a specific duration. However, this feature is generally only made available if you hold a specific number of shares in your account.
- Quick transfer of benefits: Best Demat accounts offer a swift transfer of benefits such as dividends, bonus issue of shares, stock splits, interest, and refunds.
Benefits of a Demat Account
In addition to being an indispensable part of the share market, best Demat accounts come with several benefits such as
- Swift settlements and deliveries
- Increases share trading volume and market participation
- Increases transparency
- Eliminates paperwork
- Quick and easy communication with investors
- Little to no risks involved
- Builds trust and increases investor confidence
Dematerialization: What Does it Mean?
What is Dematerialization?
In the initial days of the stock market, shares were held in a physical form by way of share certificates. However, it made the entire process of share trading cumbersome and difficult to carry out at short notice. There were also issues of share certificates being fakes or forged. Certificates were also often lost or physically damaged.
In order to eliminate these limitations and problems associated with physical shares, the National Securities Depository Limited (NSDL) was established in the year 1996. NSDL brought in the concept of Demat accounts, which could be used to electronically store shares and securities of companies. If you own physical shares, you need to convert them to electronic records before being able to use a Demat account. This process of conversion is what is commonly known as dematerialization.