With the share prices roaring high this season, the Demat accounts are much in demand. But before you start investing, you need to know and understand the basics of a Demat account and its aspects to properly use it. When the share trading in India was standardized, for better transactions and value, Demat accounts were made. These accounts are similar to your bank accounts with the only difference is that in these accounts, you hold your shares expect of cash like in bank accounts. The standardization of the share markets and transaction with the formation of the National Stock Exchange gave rise to the need for the Dematerialization of the shares and thus Demat accounts were evolved. The internet and the technology had a major role play in this whole journey of the development of the Demat accounts and today, Share trading has become popular in India because of all these facilities.
In this article, you can find the different aspects, benefits of Demat Accounts, Dematerialisation and also about Depositories system in share trading in India.
In today’s, time when everything we do is mostly on the electronic platform, that is mainly with the help of the computers, share trading has also been taken to the screen of the computers to make it way faster so that one can sell or buy at the price they seek for. The Demat accounts which can also be called or referred as the Dematerialised accounts of the shares are used for storing the stocks and the securities in the digital format or electronic one. While trading from the computer terminal, the shares are held and kept in the Demat account and used for the transaction of the shares. The Demat accounts are not only meant for the shares but for all the investment you can make in the financial industry like in government bonds, ETFs, mutual funds, shares of the private as well as government companies or organizations etc.
It is interesting for every investor nowadays to know how the shares were traded earlier when there was no Demat account. If you have someone elderly who used to or still invest in shares from the time when there was no dematerialization, you will be overwhelmed to listen to their stories. But here is a little insight to the old time of share trading –
The system or the process were known as “Ring” and the time was around 1875 when at the Bombay stock exchange which is the oldest stock exchange after Calcutta Stock Exchange in the country, had share trading in the physical format. The traders used to shout at each other to buy and sell the shares and the transaction was made in cash and via share certificates which were in paper format. Since a lot of paperwork was involved in the process; the time taken was huge which and thus the need for the dematerialization of the shares was taken into consideration.
In 1996, the dematerialization of the shares was started and the Demat accounts came into the limelight. After the dematerialization of the shares, the same was transferred to the Demat accounts of the shareholders who earlier held the physical share certificates.
The term dematerialization has come in the articles till now for many times and if you are a newbie in the market, you might be wondering what is dematerialization of the shares. So, the Dematerialization of shares is the process of converting the physical share certificates into the electronic ones. These electronic certificates provide utmost help in the trading process by quickening the trading process itself. Moreover, today, you can trade from the comfort of your home, while traveling and any possible time you want to trade when the markets are open. You can invest in foreign shares as everything is now processed by the technology and there is hardly any barrier in the investment field due to the dematerialization process.
Facilities of Depositories
Like Banks are maintained and controlled by the Central Bank which is RBI in India, likewise, the Demat accounts are maintained and controlled by the Depositories in India. The two depositories which function in India are the Central Depository Services India Ltd. (CDSL) and the National Securities Depositories Ltd. (NSDL). The Demat accounts are provided by these depositories via the stockbrokers, Depository participants, and other intermediaries. The charges of opening the accounts depend on the volume of the shares which is helpful in the account, types of the shares and also depends and vary according to the DPs.
Facilities like regular account statement of the shares you held are provided by the DPs, the transaction details, etc. It can also help in using the Demat for hypothecation against long from banks, mortgage etc. The nomination facility for the Demat accounts is also provided by the depository participants and the depository itself.
There are various features and objectives which is there in a Demat Account and the process of Dematerialization of the share trading and they are mentioned below –
As discussed, the Demat Accounts are maintained by the Depositories and the Depository participants facilitate the accounts to the investors. The Investors has to be buying the Demat accounts from the DPs and they are the only bodies who are authorized to provide the Demat services from the Depositories to the investors. Now, when shares are traded, the information goes to the depositories, they release the shares and then via DPs the shares get into the Demat accounts of the share purchaser and get out of the Demat account of the share seller.
There is a unique identification number assigned to the Demat accounts and with that number, the shares are deposited in the correct Demat accounts when transacted. Since the number is registered with the specific Demat account, you don’t have to provide or use the number each time you trade. The depositories will deliver a statement which has all the records of transaction and balance of shares of the month and you can check them thoroughly.
The process of opening a Demat account is almost similar with every Depository participant and the steps are as follows:-
There are different types of fees which you have to pay for opening, maintaining the Demat account. There are mainly three types of fee or charges which you have to bear:
Often people get confused about the trading and the Demat account. Are they same or different? What is the use of both of the accounts in trading? There are many more questions which come to our mind about these two accounts.
So, let see how these accounts are different from each other –
Is Demat Account compulsory for making the investment?
Yes, Demat accounts are mandatory in India for making investments in the capital market. Whether you invest in shares or the bonds or any other financial instruments, there is the requirement of the Demat accounts. There is another clause to this, that if there is a public offering which is more than 10 crores and an investor wants to buy a share of that issue or company, it has to be done through the Demat account.
Why closing of Demat account is necessary if not in use?
Since there can be many fraudulent activities with the Demat or the trading as well as the bank account, it is mandatory to close the Demat account if it is not in use anymore. The depositories made it mandatory by law.