When you think of the meaning of a Demat account, you immediately think of a digital storage system for your stocks. A Demat account stores your stocks in digital format, as opposed to the old system wherein your stocks were in the form of physically established paper certificates. A Demat account can store a ghost of assets like stocks, mutual funds, bonds, exchange traded funds, etc.
Demat accounts were implemented in India in 1996. This was, in effect, the end of share trading in physical form. As trading with physical shares was prone to loss, theft, counterfeit certificates, not to mention wear and tear, there was a need for dematerialisation. This is the word from which the short-form ‘Demat’ has been created. So, a Demat account can be called a dematerialised account. The creation of Demat accounts resulted in the elimination of time and effort that was previously consumed while settling trades. Earlier, trade settlement took two weeks, and now, it takes a day. In India, according to reports, there exist over 4 crore Demat accounts, and this just goes to show how Demat accounts have changed the world of investing, encouraging more investors to plunge in and invest.
When you talk of the meaning of a Demat account, you have to know that a Demat account is not just about a storehouse for stocks and shares. In fact, when you open a Demat account with a depository participant (DP), a broker or a bank that is authorised to hold assets in a Demat account on your behalf, you are permitted to hold the following in it:
Every Demat account in India is maintained with depositories. The two main depositories that govern the functions of depository participants (DPs), like your bank or brokerage, are the National Securities Depository Limited (NSDL) and the Central Depository Services Limited (CDSL). The main role that depositories play is to manage and operate the smooth function of the transfer of securities to and from Demat accounts. You may think of depository participants as branches of a main bank, and depositories as the main banks.
There are three types of Demat accounts in India today. These are broadly based on the status of citizens holding them - whether resident Indians or Non-Resident Indians:
A regular Demat account is an account that all resident Indians can open. A repatriable Demat account permits NRIs to transfer funds abroad. Non-repatriable Demat accounts also pertain to NRIs who wish to keep their funds within India.
The meaning of a Demat account really comes into play if it is linked with a trading account. You must realise that a Demat account stores your securities once you buy them. However, you cannot buy securities with just a Demat account. You need a trading account to purchase securities and deliveries are placed in your Demat account. Similarly, if you wish to sell securities, those are generated from your Demat account and sold through your trading account. In view of this, the linking of accounts, Demat & trading account, and possibly a bank account for sourcing and depositing funds, is required for investment processes.
Once you open a Demat account, you can link it to other relevant accounts and begin trading or investing. You get facilities to fund your trading account (connected to your bank account) so you can purchase securities to be held in your new Demat account.
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