The first and foremost step for trading in the stock market is the opening of a DEMAT account. Securities and Exchange Board of India (SEBI) has made it mandatory for every trader and investor to have a DEMAT account where securities can be kept in dematerialized form after the Depositories Act of 1996.
DEMAT accounts can be opened through almost all nationalized banks as well as brokers. Different DEMAT accounts are required for all the exchanges, so the first step is to decide the exchange in which you would like to trade. NSE and BSE are the two most prominent stock exchanges in India.
Each exchange has an individual depository, where the DEMAT account is opened. You cannot directly approach a depository and thus opening a DEMAT account is generally done either through your bank or broker. The purpose of DEMAT account or dematerialized account is to store the securities which are bought from the market by the investor in dematerialized form.
There are two main depositories in the Indian market, the National Security Depository Limited (NSDL) and the Central Depository Service Limited (CDSL) which serve as the depositories for NSE and BSE respectively. SEBI has made it mandatory to have a DEMAT account before trading in the stock market.
Let us now discuss DEMAT accounts in detail.
Table of Content
What is Demat Account – Meaning, Definition of Demat Account
What is a DEMAT account?
A Dematerialized account or DEMAT account, as it is commonly known as, is used for converting physical shares into an electronic form. This process is known as dematerialization and is mandatory for trading in the market. The DEMAT account can be used for holding a variety of investment instruments apart from shares including Bonds, Government Securities, Mutual Funds and Exchange Traded Funds. The DEMAT accounts work similar to a bank account but instead of monetary transactions, it is credited or debited with securities and other investment instruments.
DEMAT accounts have eliminated the hectic paperwork which was initially required for trading in the markets. The DEMAT accounts are hosted on the two major depositories of India, namely NSDL (National Securities Depository Limited) and CDSL (Central Depository Services Limited).
What is Dematerialization?
In the early days of markets, stocks and equities were issued as physical paper certificates. Whenever you want to sell your shares, you need to transfer the paper certificates to the new buyer. This whole process was very complicated and cumbersome and consumed lot of time. There were various loopholes as well which led to various forging and fraud issues. There was also issues of certificates being damaged and lost which caused huge losses to the investors.
Therefore, a need for a dematerialized system was generated, which led to the establishing of NSDL in the year 1996. NSDL was the first depository to bring the concept of DEMAT accounts and dematerialization. The process of converting the shares and investment instruments from physical form to electronic forms is known as dematerialization.
The process of Dematerialization
The introduction of Dematerialization made the trading process very easy and seamless for investors. It saved a lot of effort and time and also helped in eliminating various loopholes of the previous process. The process for dematerializing your securities is very easy. You need to open a DEMAT account with the help of a depository participant. Once your account is operational, you can send your physical share certificates along with a Demat Request Form of DRF to your depository participant. The participant will then process the request and send the physical shares back to the issuing company. The issuing company will destroy the physical shares and dematerialized shares will be sent to the depository. The depository will credit the shares to your DEMAT account.
Depository and Depository participants
Depositories are entities which maintain DEMAT accounts in India. They store all financial assets in electronic forms so that investors can buy or sell them easily. There are two depositories in India which are:
- National Securities Depository Limited (NSDL)
- Central Depository Services Limited (CDSL)
As an investor, you can reach the depository through a depository participant who will act as an intermediary between you and the depository.
Features and Benefits of a DEMAT account
The introduction of Dematerialization has transformed the stock market trading process in India. There are numerous benefits associated with the same. Some of them are:
- Ease of Trading: You no longer need to preserve your physical paper certificates. All your securities are stored safely in your DEMAT account and there are no risks of physical damages or losing associated.
- Easy Settlements: The transfer or settlement of all your shares traded is very easy. They are electronically transferred from the buyer to seller seamlessly.
- Quick transfer of Benefits: The remittance of earned profits or other benefits like dividend, stock splits are very easy and processed very fast when compared to the older methods.
- Collaterals: You can pledge your securities which you hold in your DEMAT accounts to a bank and use them as a collateral for obtaining loans at attractive interest rates.
These are some of the features and benefits which are associated with a DEMAT account. The government has made it mandatory to hold a DEMAT account before you step into the world of stocks and other investment instruments.
Conclusion
DEMAT accounts have revolutionized the way investors and traders trade in the market. It must be however noted that you can trade in the market using a trading account with a SEBI registered broker. The DEMAT account can only be used for holding your securities and investment instruments in dematerialized form. If you are new to the market, it is important to have a DEMAT account opened through a depository participant and also have a risk profile analysis to know about the amount of risk you can take in the market. Once you are done with these two aspects, you are almost ready to step into the world of stock markets.
