One of the most important prerequisites for participation in the Indian stock market is a demat account. Without it, you cannot purchase or sell shares or any other securities such as bonds, mutual funds or Exchange Traded Funds (ETFs) on the stock exchanges.
Although most individuals know that they need a demat account to trade or invest in the markets, they often fail to realise its importance. Here’s a comprehensive overview of what a demat account is and how important of a role it plays in making securities trading in India seamless.
What is a Demat Account?
A demat account is an electronic account that is designed to store a wide range of securities such as shares, bonds, debentures, mutual fund units and Exchange Traded Funds (ETFs) among others.
Currently, two depositories are operational in India – Central Depository Services Limited (CDSL) and National Securities Depository Limited (NSDL). To open a demat account, you need to get in touch with an entity known as the depository participant (DP). The DP is an intermediary between you and the depository. Generally, most depository participants are also stockbrokers.
How Does a Demat Account Work?
Now that you’re aware of what a demat account is, let’s take a look at an example to try and understand how it works.
Assume that you’ve opened a trading and demat account with a stockbroker cum depository participant. Using your trading account, you place a buy order for 50 shares of Infosys Limited. The buy order gets forwarded to the stock exchange where it is matched with a corresponding sell order. Once the buy order is executed, the 50 shares of Infosys Limited that you’ve purchased will be transferred directly to the demat account linked with your trading account.
Similarly, when you decide to sell the shares of Infosys Limited, you need to place a sell order from your trading account. Once the order is executed by the exchange, the shares will be automatically debited from the demat account linked to your trading account.
What is the Importance of a Demat Account?
The importance of a demat account doesn’t just lie in being a mandatory requirement for participation in the Indian stock market. As a matter of fact, there are plenty of other reasons why such an account is considered to be a vital requirement for online trading. Here’s a closer look.
Ensures the Safety and Security of Financial Instruments
Previously, when shares and other securities were being issued physically, there were a lot of risks involved. The physical securities were prone to forgery, theft, loss and damage. Storing securities electronically in a demat account ensures safety and eliminates all of these risks.
Enhances Accessibility and Convenience
Since all of the securities are stored online electronically, you can access them at any point in time and from wherever you are in the world. In fact, you don’t even need a computer anymore. Both the depositories – NSDL and CDSL – have dedicated smartphone applications that allow you to access and view your investments using just your phone.
Makes Dematerialisation and Rematerialisation Possible
Dematerialisation is the process of converting physical shares and securities into electronic form. Rematerialisation, On the other hand, is the process of converting dematerialised back to their physical form. These two processes are only possible if you have a demat account in your name.
Enables Quick Transfers of Securities
Similar to a bank account, you can instantly transfer securities from one demat account to another. All you need to do is log into your account, input the demat account number to which you need to transfer and authenticate the transaction by entering the OTP you receive on your registered mobile number.
Lets You Avail Loans
If you’re in urgent need of some funds to cover your emergency expenses, you can use the securities that you possess in your demat account as collateral to avail a loan. However, you should keep in mind that since the securities in your account would be pledged, you will not be able to sell or transfer them until you repay your dues completely.
Makes the Disbursal of Corporate Benefits Easier
Companies routinely distribute profits that they earned in the form of dividends. These dividends need not always be in cash. Sometimes, they can be in the form of bonus shares as well. A demat account makes disbursing such benefits a lot easier. The bonus shares can simply be credited to the demat accounts of eligible investors.
Conclusion
With this, you must now have understood what a demat account is and how important it is for electronic securities trading. Without it, trading as we know it today would not be possible at all. The best part of a demat account is that it has so many other benefits apart from being just a safe and secure storage space for securities.
