A dematerialized or demat account is a facility that allows investors to hold shares in an electronic format. This is similar to a bank account, where you keep your money. In this case, a demat account holds the certificates of your financial instruments like shares, bonds, government securities, mutual funds and exchange traded funds (ETFs).
You need a demat account before you start to trade on India’s stock exchanges.
Since all your certificates are electronic, transactions are less cumbersome. You never have to deal with the physical documents and the related paperwork. When you trade shares or other financial instruments, there is no need to actually hand over certificates to the buyer or seller.
When you are dealing with physical copies of certificates, there are many risks involved like fake securities, bad delivery, incomplete paperwork, or simple destruction of the paper or ink. In the demat form, certificates last longer and you eliminate these risks
Dealing in physical securities involves a lot of additional costs such as handling expenses, stamp duty as well as for safety. These are very hard to determine beforehand. All these are eliminated when maintaining a demat account. Also, all costs are detailed in advance.
Since we are dealing in the electronic format, delivery is completed within a few days. Earlier, this used to take weeks, if not months. This means transactions become seamless and inexpensive.
There are three key requisites for trading in the stock market – a bank savings account, trading account and a demat_account account. When you buy a share, you own a portion of a company’s assets. To prove your ownership, you are given a certificate. Today, this certificate is electronically available in your demat_account or demat_accounterialized account.
For this reason, the first step of trading in the equity market is creation of a demat_account account. There is a central database of all demat_account accounts. It is called a depository. There are two depositories – CDSL and NSDL.
Banks, brokers and financial institutions are empowered to offer demat_account services. They act as the intermediary between the central depository and the investor, and are called depository participants (DPs). This means, CDSL and NSDL hold details of your shareholding on your behalf, just like banks hold your money in different kinds of accounts.
Just like the demat_account account, a trading account is a must for investing in the stock market. You register for a trading account with a stock broking firm. Each account comes with a unique trading ID, which is used for conducting transactions. To conduct a trade, you deposit some money in your trading account. This is linked to your demat_account account. Using the money in your account, you place an order for a stock. Once the order is processed, the stock exchange identifies that the order belongs to you using your unique trading ID. It then forwards the shares to your demat_account account
At any time, your demat_account account reflects the details of your portfolio. This includes stocks, bonds, mutual fund units, Exchange Traded Funds (ETFs), as well as government securities in electronic form. So, whenever you invest by buying stocks, it will be credited to your demat_account account. Similarly, if you sell any of your holdings, these will be removed from your account.