With the standardization of share trading transactions, establishment of NSE, and use of internet and computer technology, online trading was introduced, which gave birth to Dematerialization of shares and Demat account.
Demat account or dematerialized account provides the facility of holding shares and securities in electronic format. It is a common repository to hold electronic certificates of purchased financial instruments such as stocks, bonds, government securities, ETFs, and mutual funds. During online trading, shares are brought and held in demat account, thus facilitating trade. This account is provided by depository services such as NSDL and CDSL through intermediaries such as Angel Broking. The charges of demat account vary as per the volume held in the account, type subscribed, and the terms and conditions laid by the depository and the broker.
Demat accounts allow investors to hold their investments in different asset classes in an electronic format. It is similar to a bank account, which is used to hold money. In the case of a demat account, all the investments an individual makes in shares, government securities, exchange traded funds, bonds, and mutual funds are held in one place.
One can open a demat account through any of the several depository participants (DP). The DP is an intermediary between the account holders and the central depository (CD). Indian CDs include NSDL (National Securities Depositories Limited) and CDSL (Central Depository Services Limited).
Aims and Objectives of a Demat Account
Reduce paperwork: Because all the different investments are electronically held, the transaction time reduces due to decreased paperwork. The need for physical securities and associated documentation is eliminated, which makes the entire procedure more convenient and less cumbersome. Parties to the transactions do not need to exchange physical securities.
Lower risks: Physical copies can be damaged, torn, lost, or misplaced. In addition, there are other risks like bad deliveries, fake securities, or incomplete paperwork. These risks are completely eliminated with demat accounts.
Decreased costs: Transaction costs with physical securities are high due to extra expenses like stamp duty and handling charges. Moreover, these costs are often not determinable prior to the completion of the transaction. With a demat account, not only are these extras eliminates, but the exact cost is also known before executing the transaction.
Instantaneous: Electronically dealing in securities ensures that the investor receives credit in the demat account quicker. Historically, physical deliveries often took weeks. Such delays and waiting for longer periods do not exist with demat accounts.
Important Terminology to Understand
Electronic certificate: Three important requisites while dealing in investments include bank account, demat account, and trading account. When one purchases shares in a company, one’s ownership is marked through a certificate. This is now available in an electronic format, which is seen as demat credit.
Central Depository (CD): A central agency known as the central depository maintains all information related to demat accounts opened with DPs across the country. These include the Central Depository Services Limited (CDSL) and National Services Depository Limited (NSDL).
Depository Participants: Several brokerage firms, banks, and other financial institutions offer demat accounts to clients. The DPs are intermediaries between the CD and account holders.
Transaction Identification: A trading account is as important as a demat account to deal in electronic securities. Every account is provided with a unique identification number that is used for all transactions.
Portfolio Holding: An investor can check all of his or her holdings through the demat account. This includes equity holdings, government securities, bonds, exchange-traded funds, and mutual funds. When he or she purchases one of these investment products, it is reflected as a demat credit. Sale transactions are debited from the demat account.
No Minimum Balance Requirement: Unlike a bank savings account, demat accounts do not have any norms for maintenance of minimum balance. The regulators do not prescribe any regulations that require maintaining a certain number of securities in the demat account.
As it is now clear how useful demat accounts are, it is time to open a demat account and reap the benefits.