How Does A Demat Account Work?

The Demat account system was first introduced on the NSE in 1996. It makes trading and holding financial products such as bonds, equity, government securities, exchange-traded funds (ETFs), mutual funds, insurance, and so on easier. India has two depositaries: National Securities Depositary Limited (NSDL), under the NSE, and Central Depositary Services Limited (CDSL), under the BSE. This article explains how a Demat account works and its importance in the financial market.

Working of a Demat Account

A Demat account works through a number of different entities and procedures. A detailed explanation of a Demat account’s operation is provided below:

1. Account Creation

A person must go to a registered depository participant (DP), such as a bank, a financial institution, or a brokerage firm, to open a Demat account. The investor must submit the proper paperwork, which includes a filled-out application form, identity and residence proof, and bank account information.

2. Dematerialisation

The investor can use the Dematerialisation procedure to change physical securities into the electronic form once the Demat account is set up. The Dematerialization process starts with the investor giving the DP their physical certificates, who then verifies them and sends them to the issuer or registrar. The physical certificates are destroyed after verification, and comparable electronic units are credited to the individual’s Demat account. 

3. Trading and Resolution

Investors can trade securities on various stock exchanges using a Demat account. The securities are deducted or credited from the investor’s Demat account, depending on whether a purchase or sell order is completed. The transaction’s specifics, such as the quantity, cost, and date of settlement, are electronically recorded in the account.

4. Corporate Behavior

The investor’s Demat account is automatically updated in the event of company activities like bonus issues, stock splits, or dividends. For instance, extra shares are credited to the investor’s Demat account in the designated ratio if a company announces a bonus issue.

5. Pledged and Lending

Demat accounts also make it easier for securities to be pledged or lent. Investors can lend their securities to earn extra money or use them as collateral for loans. While the pledged or lent securities are blocked in the Demat account, the investor still retains ownership.

6. Statements of account activity 

The DP routinely provides specifics of transactions, assets, and business actions. These statements aid investors in tracking their assets and investments.

Advantages of Demat Account 

Now that you are aware of how Demat accounts work in India, let’s look into some of the main benefits that Demat accounts provide for businesses and investors.

1. Security: Before introducing Demat accounts, investors received physical certificates proving their ownership of securities. Physical certificates, however, carried additional risks such as theft, loss, damage, and forgery. These risks have been successfully removed because securities are kept electronically in a Demat account. This also has made the process of trading securities easier.

2. Easy accessibility: Online access to a Demat account is available anywhere. You may access and manage your investments without even using a computer. You can access your Demat account from anywhere with specialised smartphone applications offered by India’s depositories, Central Depository Services Limited (CDSL) and National Securities Depository Limited (NSDL). 

3. Quicker and more seamless transactions: Trading physical securities was time-consuming and difficult. It was necessary for investors to personally visit the stock exchange and make connections with other possible buyers and sellers. Moreover, it required time for the securities to be transferred. On the other hand, you can quickly buy and sell assets online through stock exchanges because of the Demat account. After the transaction date (T+1), the automated transfer of securities is often finished in a single day.

4. Reduced Prices: Handling physical securities involves many expenses, including stamp duties, handling fees, storage fees, and courier fees. However, all charges associated with a Demat account are erased, with the exception of stamp duty. These days, most stockbrokers provide zero brokerage plans, substantially lowering trading expenses. 

5. Corporate Actions: Paying incentives to investors during the physical certificate period was difficult for listed companies. Investors failed to claim many bonus shares, stock splits, and dividends for years. Fortunately, disbursing these rewards has become simple due to Demat accounts. The corporation automatically credits investors’ Demat accounts in the event of bonus shares and stock splits.

Conclusion

A Demat account provides a safe and effective platform for holding and trading assets in electronic form. Physical certificates are no longer required. Trade procedures are simplified, and the account interacts smoothly with trading and savings accounts. Demat accounts have changed the way assets are held and traded in the financial market. They provide investors with ease, transparency, and improved accessibility. It is simple to open a Demat account. It enables investors to take advantage of digital securities’ benefits and actively engage in the financial market.

FAQs on Working of Demat Account