How does a Demat account work?

Once an investor decides to trade in online equity shares and other investment options like mutual funds, bonds, government securities, and exchange-traded funds, he can approach a Depository Participant registered with either the NSDL or the CDSL. Once the documentation process is complete, the DP opens a Demat account for the investor, either with the NSDL or the CDSL.

The investor is provided with a Unique ID, your Demat account number. The total characters in every demat account number in India are 16; however, the format of the account number depends upon which central depository the account is opened with. In NSDL, the first two characters are alphabets determining the country the investor belong to (e.g., IN98765432123456 for India). For CDSL, every character is a numerical (e.g., 9876543212345678).

Every account number is a combination of the DP ID investor's client ID. The client ID is unique to every investor and identifies their specific portfolio. The first 8 digits are the DP ID, which is the unique identification number provided to the Depository Participant by the Central Depository. The next 8 digits are the investor's client ID. So for the NSDL, IN987654 is the DP ID, and 32123456 is the client ID.

If they wish to start buying the securities, the investors may have to provide a cheque. The Depository Participant, now as the investment broker, will purchase the electronic or dematerialized shares for you and maintain them in your Demat account. The investor can view them in the Statement of Holdings. If the investor chooses an online platform, the holdings can be viewed online. Generally, the shares are credited by the DP on a T 2 basis, i.e., Trading Day 2 days.

If the investor wishes to sell the shares, a delivery note with detailed information regarding the stock to be sold has to be given to the Depository Participant (DP). The DP will sell the respective shares, and the money will be credited to the investor. If the investor is using an online platform, the debit of shares and the credit of money are immediately visible in the account.

When the listed compnies give out the dividends or bonus, they get a list of their shareholders from the NSDL or the CSDL and thus credit the investor accounts.

What are the features and benefits of a Demat Account?

1. LOWER RISK–

Possessing shares in their paper format carries a lot of risks like loss, misplacing them, damage to the certificates, etc. Dematerialization of shares eliminates the risk of loss and damage to the securities. The paper certificates also had high incidences of forgery and theft. As the holdings are now in an electronic format, it has reduced the threat of forgery and theft.

2. EASY TO HOLD–

A demat account makes equity trading and your shares accessible. You can trade in securities, view your holdings, transaction history, etc. at the click of a button. It also makes managing your details easy. You can make changes to your address, linked phone number, linked bank account, and such other account- related changes for every company stock all from your demat account.

3. EASE OF TRADING–

Earlier, paper certificates had to be sent to the Company or the Registrar and Transfer authority to change the ownership of shares, which resulted in delays, additional costs and loss of certificates. With demat accounts; transfer of shares has become easier. Trading in shares, buying, storing, selling online has become seamless and streamlined.

4. REDUCED COSTS–

Stamp duty applicable on transfer of physical shares, which was a cumbersome process for investors. Dematerialization of shares has eliminated the stamp duty and reduced all other transactional costs.

5. REDUCED TIME–

A demat account minimizes the time taken to trade in equity investments. Buying and selling of shares is a quick process that can be done intra-day through an online trading platform. Similarly, changing personal details in your stocks can be done through a single demat account in which the shares are held. All this has reduced the time taken to trade in and manage securities for investors.

6. ODD-LOT PROBLEM RESOLVED–

Earlier, there were multiple restrictions on the selling of shares. Shareholders could not sell shares in odd lots. Demat Accounts has eliminated those restrictions.

7. VARIETY OF INVESTMENTS-

With the diversification of investment options, a demat account can store mutual funds, bonds, government securities, Exchange Traded Funds (ETF), etc.