How Does a Demat Account Work? A Step-by-Step Guide

Initially, trading in the stock market was completely different from how we know it today. Physical trading was the only way to buy and sell shares, and traders and stockbrokers had to be physically present at the exchanges. They would use voice and hand signals for the trading of physical share certificates. These certificates were sent to the addresses of the buyer. Multiple issues arose from this as the shares could get lost in the postal system due to many factors or be damaged. There was also a possibility of the shares being robbed or the trader receiving fake shares.

There were multiple drawbacks to physical securities, apart from just the transportation of shares. It was also difficul to store the shares safely as one had to make sure that the paper shares were not damaged over time. The settlement period of these shares was also long, which made it difficult for trading. The stock market wasn’t a liquid investment option, with the settlement period being 14 days. One would have to wait for an extended period to receive funds after the sale of shares.

The Demat account system was introduced to combat these issues and the hassle of physical certificates. This was done in 1996 by the National Securities Depository Limited (NSDL), initially, for the National Stock Exchange (NSE).

With the help of the Demat account, trading has been refined, and there is no need to be physically present at the stock exchange. The Internet and a Demat account combined have helped revolutionise trading and improve it drastically. As a trader, one must understand what a Demat account is and how to use it.

What Is a Demat Account?

Demat stands for dematerialisation, and a Demat account is used to store various types of securities in electronic form. It is a safe and secure account and plays a crucial role in trading. You can store multiple types of securities, like:

• Equity, i.e., shares or stocks of a company
• Bonds and Debentures
• Sovereign Gold Bonds
• Exchange Traded Funds
• Government Bonds
• Mutual Funds
• Tax-free Bonds
• Certificates of Deposits

A Demat account is provided by depositories, who are responsible for hosting and ensuring the security of the account. There are two depositories in India:

National Securities Depository Limited (NSDL)

This is the oldest depository in India and is primarily compatible with the NSE.

Central Depository Services Limited (CDSL)

Founded in 1999, CDSL is the first listed Indian central securities depository. It has grown to be the largest depository in India.

To open a Demat account, one cannot approach the depository directly. A depository participant (DP) must be involved. DPs are entities that have memberships with depositories and provide the services of a depository. They can be any entity based on what they do, i.e.,

• Bank
• Non-Bank Financial Corporation (NBFC)
• Stockbroker

A DP enables its customers to open a Demat account and convert all the physical securities to digital form. One can use a DP based on the requirement for trading in the stock market; a stockbroker will be the best. Learning how a Demat account works will help you make the best use of it.

Working of a Demat Account

A standalone Demat account can only be used to store securities by converting them physically and storing them there or by transferring shares there. A Demat account coupled with a trading account provides multiple trading benefits and advantages. With the help of a trading account, shares can easily be credited or deposited from your Demat account. Linking your bank account to this eases the mechanism of fund transfer. While trading, funds get deducted from your account, with the shares being deposited in the stipulated settlement period. In case you choose to sell a share, the shares are debited from your Demat account with the help of the trading account and money is deposited into the bank account for the same.

A Demat account contains your personal data, like identification, along with your holding. Any dividends, bonus stocks, etc. are credited automatically into your Demat account. The Securities and Exchange Board of India (SEBI) mandates that traders and investors have a Demat when they trade in equity. This means that for investing in the stock market a Demat account is a necessity.

How to Activate a Demat Account

To create or open a Demat account, you’d first have to choose a DP. If you choose to carry out trading activities and require assistance with the same, a stockbroker like Share India will be a good choice. They can help you learn about trading as you embark on your journey towards financial freedom. After choosing the right stockbroker and checking out its features, you can then go on to figure out how to open your account.

There’s a form you’d have to fill out, which would contain all your details, like identity, address proof, bank account details, etc. Along with this, you’ll have to submit some documents for verification purposes. After this step, you’ll have to complete your Know Your Customer (KYC) check, which can be eKYC or physical KYC. After all of these steps, your Demat account will be created, and you can start trading.

Benefits of Demat account

A Demat account comes with multiple benefits for its users. Some of these benefits are:

Secure

A Demat account is an extremely safe place to store securities. Issues associated with physical share certificates, like theft, robbery, forgery, etc. are eliminated. This benefits you drastically as shares are traded in a secure manner.

Convenient

A Demat account makes trading easy. It enables a trader to trade from anywhere at any time while share transactions happen seamlessly. There is no limit to the number of shares you can purchase; you can also purchase odd lots. With physical certificates, traders and investors had to purchase a minimum amount of shares, irrespective of the number they wished to purchase. Demat account has made trading accessible for everyone as traders can buy a single share without having to adhere to any minimum purchase limit.

Comfort

A Demat account gives traders the freedom from where and when they can trade. There’s no limitation on how long one has to spend on trading as well. You decide how you trade and which platform you trade from.

Versatility

Store and invest in multiple types of securities in one place.

Corporate Actions

Any corporate actions like dividends, the issue of bonus stocks, stock splits, etc., are carried out effortlessly. As an investor, it’s extremely advantageous to receive these shares and the dividends without having to be involved in the process.

Management

You can easily have a glance at your portfolio and make a decision based on its performance. It gives you an easy way to manage all your holdings in one location.

Conclusion

A Demat account is an extremely useful tool that has improved traders’ trading experiences. It has led to a secure way of trading as well as innovation in trading strategies. Finding the right DP will enable you to open a Demat account and learn how to use it.

Frequently Asked Questions (FAQs)