In India, the Securities and Exchange Board of India is the top-most Authority for the regulation of share trading. It lays down that opening a Demat account is requisite if you want to buy and store shares in their dematerialized format.
Having a demat account ensures that the investor has a safe environment to trade in equity-related investments. Before 1996, share trading was a tedious and lengthy process with colossal paperwork. Managing the paper-based securities was a tiresome and costly affair. Dematerialization and the regulation of the electronic trading by both SEBI and the central depositories have made share trading seamless and accessible for every investor. The conversion of share certificates to electronic formats increases their ease of handling and accessibility.
A demat account has to be opened with a Depository Participant registered with either of the two central depositories in India. The two depositories are –
The National Securities Depository Limited (NSDL) promoted by the National Stock Exchange (NSE)
The Central Depositories Services Limited (CDSL) promoted by the Bombay Stock Exchange (BSE)
The DP needs to be authorized by the SEBI and should follow all the necessary regulations.
When you find the depository suitable for you, collect and submit duly filled and signed account opening form with all the requisite documents. After verifying the documents, the DP will open your account linked to either the NSDL or CDSL. You will be provided the copy of the agreement, schedule of charges, demat account number, and unique client ID. An online trading platform is also required to trade in shares online. The DP will provide the login credentials of these platforms.
The Depository Participant will purchase the electronic or dematerialized shares for you and maintain them in your Demat account. You can view them in the Statement of Holdings.
When the listed companies give out dividends or bonus, they get a list of their shareholders from the NSDL or the CDSL and thus credit the investor accounts.
1. LOWER RISKS
Before 1996, possessing shares as paper certificates came with a lot of problems. The risks included loss of certificates, damage to the certificates, or misplacing them. The paper certificates also caused high incidences of theft and forgery. Dematerialization of shares eliminates all these threats and makes share trading a safer experience.
2. EASY TO HOLD
Having a demat account makes shares and their trading accessible. Investors can now easily trade in securities, view their transaction history, analyze their holdings, etc., at the click of a button. It also makes management and changing any personal details linked to the demat account easier. It is easy now to change the linked address, linked phone number, linked bank details, and any such account-related changes for every company stock from the comfort of one single demat account.
3. EASE OF TRADING
In case of paper share certificates, they have to be sent to the issuing company or the Registrar and Transfer Authority to get the ownership of shares transferred. This entailed a very costly procedure with delays and loss of certificates. With a demat account, you can transfer shares at the click of a button. Demat account has made share trading a seamless, streamlined, and cost-effective process.
4. REDUCED COSTS
If an investor wished to transfer physical share certificates, they had to pay stamp duty, making it a very cumbersome and costly procedure. Dematerialization of shares has ensured a smooth transfer of shares online, thus eliminating stamp duty and reduced other applicable transaction costs.
5. REDUCED TIME
Trading in shares through a demat account considerably reduces the time taken for buying and selling of stocks. Introduction of demat account and dematerialization of shares have introduced intra-day trading on online trading platforms. Investors can also change their registered personal details in all the stocks through the single point of a demat account. This has reduced the time taken to trade in securities and manage the portfolio.
6. ODD-LOT PROBLEM RESOLVED
Before the advent of demat accounts, there were various restrictions on the selling of shares. Traders could not sell their shares in odd-lots, which caused a lot of problems. However, trading through a demat account has eliminated all these restrictions. Shareholders can now sell their shares in any number with the click of a button from the comfort of their online accounts.
7. VARIETY OF INVESTMENTS
The investment options have diversified over the years and include options like mutual funds, government bonds, government securities, Exchange Traded Funds, etc. A demat account allows you to store all the different types of investments in their electronic format.
A demat account enables an investor to opt for a safe platform to trade in equities and diversify his investment portfolio. The Depository participants provide the requisite knowledge and support to these investors so that they can make a well-informed decision regarding their investment. The DPs help investors recognizing their investments goals and objectives and find the perfect portfolio with the right mix of holdings. The central depositories, NSDL and CDSL, ensure a comprehensive database and records of all the investors in the country.
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