What is Demat Account? Trading in the stock market is very common these days. More and more people are indulging in trading and investing in the stock market. The reason for such an increase in participation in the stock market is the opportunity to make good returns.
Thus, the first question that comes to the mind of the beginner in the stock market is how to trade in the stock market. The answer to this question is a Demat account. To put it another way, DA acts as a means to trade or invest in shares or securities. Without it, no transaction in shares or securities is possible. In this article, you will understand the basic concept of the Demat account and much more.
Before going into the concept of DA. Let us first understand the meaning of Demat account.
Meaning of Demat Account
Demat account or dematerialized account is an account that holds the shares and securities of an individual in an electronic form. When an individual indulges in trading or investing in shares or securities all the transactions are done through the DA. To put it another way, just like the banks hold the money of the individuals. Similarly, the DA holds the shares and securities of the individual in the account.
How Demat Account Works?
Demat account is a service that is provided by depositories like NSDL and CDSL via intermediaries or depository participants or brokers like Sharekhan, etc. Investors make an account with depository participants and indulge in the transaction of shares and securities. The DA consists of a unique id that is given to every individual who opensan account. NSDL and CDSL are the main authorities who hold all the demat accounts. The depository participants act as a middleman. The DA shall hold your purchases and you can view it anytime in your portfolio. In addition, with every transaction, the DA get continuously updated every time you conduct a transaction.
While using the term demat, you will often come across the term dematerialization, let us understand the meaning of dematerialization.
What is Dematerialisation?
Dematerialisation is the process of converting physical shares into electronic form. The investors need to open a demat account with the depository participant to transact in shares and securities in electronic form. In addition, if the investor has shares or securities in physical form, he can convert them into electronic form by opening a demat account and surrendering his physical shares.
By now we have enough knowledge of the Demat account and dematerialization of shares and securities. Let us now understand the benefits of using the demat account.
Benefits of Using Demat Account
In the demo account, all the shares and securities are held in electronic form. There is no paperwork at all. Thus, it reduces the risk of theft, wrong delivery of shares, etc. In addition, any company related activity like a stock split, bonus etc. are credited to the demat account.
DA helps in reducing the cost. There is no stamp duty charge on shares and securities in dematerialized form. Earlier there were charges on the transfer of securities.
Odd Lot Problem
Before demat account, trading of shares was done in lots. However, after demat account, this problem no more exists. Now the shares can be transacted in any numbers.
Easy to Hold
Shares and securities are easy to hold in DA. Since the DA holds the shares and securities in electronic form, they are safe against tears and damage in case of paper certificates. Therefore, it is convenient to hold shares and securities in the demat form. In case of the death of the DA holder, the holdings can be easily transferred in the favour of the nominee.
All the transactions in the DA are automatically updated. The DA holds all the details of the account holders like address, name, time of the transaction, etc. So the companies always have details of all the transactions.
The biggest benefit of demat account is that it acts like a bank and holds not only shares in the account. In fact debt instruments like bonds, etc. can be held in a single account.
Demat Account Charges
Since the DA is a service provided by the depository and depository participants, the individual is required to pay charges. The Demat account charges vary from one brokerage firm to another. Every individual is required to pay brokerage along with other charges for every transaction in the DA. The percentage of the brokerage vary depending on the organization and its services. Therefore, before opening a Demat account one must look at the Demat account charges and services offered by different brokers in the market. In fact, many brokerage firms these days open a DA without any opening charges. However, they charge brokerage charges or operation fees.