Advantages of Demat in IndiaIf you’ve traded/invested in almost any security in recent years, you’re surely aware of the term Demat Account. Usually opened at bank accounts, or with leading brokerage houses like Goodwill, you must have surely wondered why you’re required to open a demat account in the first place, especially when you’re also asked to open a trading account. So – what are demat accounts? Do we really need two different types of accounts to perform trades? What are the advantages of demat accounts in India? In this article, we’ll go through the many nuances involved, and by the end of it, you’ll have answers to all these questions.
Demat Accounts Vs Trading AccountDemat accounts are very different to trading accounts. A Demat Account is a bit like a bank account for your share certificates and other securities that are held in an electronic format. This can be used for trading stocks or any other securities like bonds, commodities, derivatives, mutual funds, and IPOs. A trading account on the other hand, is opened with the stock broker, to ensure that the trades are effected. The balances in the trading account will be in a form of a number of shares or units of mutual funds and can be withdrawn and transferred to your actual bank account at your convenience.
What does Demat stand for?The word Demat is short for the word “dematerialization”. Dematerialization refers to the process of converting physical assets into electronic form and making them available for trading or investment purposes. Let’s use an example to understand why demat accounts are needed. Say you want to purchase shares of Company ABC. You will need to transfer those shares into your name once you purchase them. Formerly, you received physical certificates bearing your name from the exchange. As you can imagine, this involved a lot of paperwork. Every time a share was bought or sold, a physical certificate had to be created. This led to a 15, 16 day settlement cycle, and was not robust enough to facilitate secure transactions. The Demat Account system was introduced for trades on the NSE in 1996 to eliminate this paperwork.
Purpose of DematerializationAs mentioned above dematerlization is a process of transferring physical securities into electronic form. It means that there is no room for a physical certificate to be lost and no need to keep it at home. The Demat account offers you an opportunity to buy stocks online, manage your portfolio, and transfer funds easily with the help of your mobile phone or computer.
Dematerialization benefits both investors and companies.It also reduces the time taken to transfer shares. The entire process of dematerialization is done electronically, thus reducing paperwork and reducing the transaction costs associated with transferring shares. This can be especially useful for large companies that have to deal with multiple shareholders or family members who might want to sell their stake in a company at once. By having a Demat account, you can:
- Transfer your investments without having to visit an exchange office physically or post office.
- Reduce the time taken to transfer shares. Ensure that you have the original share certificates, which will help with any claims or disputes regarding your investments.