What is a Demat Account?
Last Updated: Jul -16-2019
Similar to a bank account which holds money, deposits etc, a Demat account is used to hold financial instruments like shares, bonds, government securities, mutual funds, and exchange-traded funds (ETFs) in an electronic or dematerialized form.
Dematerialization is the process of converting the physical share certificates into electronic form, which is much more easy to maintain and is accessible from anywhere around the world.
Demat account was introduced in 1996, prior to which traders used to shout their price to buy or sell. Once the trade was executed, money was exchanged for share certificates generating a lot of paperwork. Moreover, the danger of fake certificates, theft destruction by elements, were also averted.
According to the Depository Act of 1996, by SEBI (Securities and Exchange Board of India), it is a must for equity investors to have a Demat account. Hence the first step to invest or trade in equities or stock market is to open a Demat account.
BENEFITS OF DEMAT ACCOUNT
- It is a safe and convenient way to hold securities.
- Risks associated with physical certificates such as bad delivery, fake securities, delays, thefts, etc. are eliminated.
- The bonus/right shares allotted to the investor will be immediately credited to his account. There is no risk due to loss on account of fire, theft, or mutilation. Transaction costs are usually lower than that in the physical segment.
- There is a major reduction in paperwork involved in the transfer of securities, and also a reduction in transaction cost, etc.
IS A DEMAT ACCOUNT A MUST?
Nowadays, practically all trades have to be settled in a dematerialized form. Although the market regulator, the Securities and Exchange Board of India (SEBI), has allowed trades of up to 500 shares to be settled in physical form, nobody wants physical shares anymore. So a Demat account is a must for investing in the stock market.
WHOM TO APPROACH TO OPEN DEMAT ACCOUNT?
Demat Account service is provided by depositories such as NSDL and CDSL through intermediaries / Depository Participant / Stock Broker. So, technically any bank or share brokerage company which is a registered Depository Participant (DP) with NSDL or CDSL can open a Demat account for their clients.