In Earlier days, traders and investors were used to buying and selling the shares physically.
This physical movement took place through physical certificates.
However, this system was suffering from the many disadvantages as follows:
- Involvement of lots of paperwork
- Lengthy procedure
- Risk of receiving fake shares
- Higher Transaction costs
Therefore to overcome the above disadvantages and to simplify the process of trading, the Dematerialization of shares was introduced in 1996.
What is Dematerialization?
De-materialization is a process in which the physical certificates of shares are getting converted into electronic form.
In this process Investor’s accounts are get credited with the number of shares and price as allotted to them in physical form.
In simple language, through the help of the Demat account, an investor or trader can buy and sell the shares and other products electronically.
Therefore, as per the Securities and Exchange Board of India (SEBI) guidelines, it is compulsory to have a Demat account for every shareholder to settle their trades electronically.
How Demat account works?
To understand how the Demat account works; let’s take the example of your bank account.
Like Bank issues a passbook in which all the debit and credit transactions are recorded.
Similarly, the debit and credit side of the Demat account is maintained on buying or selling of shares.
For trading, you have to place an order through your trading account.
Once you place the order, the initiation of share exchange begins.
Once the process completes, the price gets deducted from your trading account and shares reflect in your Demat Account at the price you received the shares.
Similarly, when a shareholder sells the shares, the shares are get debited from their Demat account and the price is credited in the trading account.
Moreover, you can also trade and hold other investments like mutual funds, index, gold, bonds, debentures, Government securities, initial public offerings(IPOs), etc. through your Demat account.
What are the facilities provided by a Demat Account?
Easy transfer of Shares:
The primary function of the Demat account is to easy and quick transfer of the shares.
You can do a much faster transfer of shares and commodities trading through the Demat account as soon as your DP receives instructions.
You can avail of the loan facility by pledging the shares and securities held in your Demat account.
You can access Demat account details on a mobile phone, laptop, tabs, etc.
You can easily manage your portfolio of other facilities at each access, all you need is internet connectivity.
Benefits of Corporate actions:
Having a Demat account allows you to get all the corporate benefits like dividends, refunds, interest, bonus issues, ESOPs, etc. directly in your bank account.