If you’re new to the world of the stock market, there’s a high chance of you coming across the term ‘demat account.’ Have you ever wondered what it is? That’s exactly what we’re going to get to know. In addition to that, we’ll be taking a good look at the features and benefits of demat accounts as well. So, without further ado, let’s go ahead and first answer the question ‘what is a demat account?’
What is a demat account?
A demat account is an electronic account that you open with a depository like the National Securities Depository Limited (NSDL) or the Central Depository Services Limited (CDSL). It helps you store the records of financial securities such as shares in an electronic format. Just like how a savings bank account is used to hold your money electronically, a demat account is used to electronically hold the shares and other securities that you own.
Now that you know the answer to the question, ‘what is a demat account?’, let’s try to understand how it works via an example.
For instance, when you purchase shares of companies in the stock market, those shares get credited to your demat account. And when you sell those shares, they get debited from there. See how similar it is to your regular bank account?
Features of demat accounts
There are many user-friendly features of demat accounts that make financial transactions easier. Here’s a preview.
Electronic transfer of securities: With demat accounts, you can transfer the securities that you own in no time. This makes the entire process of buying and selling shares of companies that much faster. In addition to this, transferring the securities from your demat account to another can also be done electronically via electronic Delivery Instruction Slips (DIS).
Ability to take loans on your securities: Both the demat account service providers, NSDL and CDSL, allow you to pledge the securities held in your account as collateral for a loan.
Ability to receive dividends directly from the company: With a demat account, you can directly receive the stock dividends and bonus issues of shares released by companies.
Benefits of demat accounts
Now that you’ve seen the features of demat accounts, let’s take a look at some of the benefits of demat accounts.
Reduced risk: With physical share certificates, there was always a risk of theft, forgery, loss, or mutilation. But thanks to demat accounts, all of these risks have been effectively nullified.
Easier access: Since demat accounts are electronic in nature, you can access your account from anywhere in the world at any time. All of the information is stored in a central cloud server and can be accessed via the internet.
Lower costs: With demat accounts, there’s no concept of stamp duty charges, registration charges, or handling charges. This ultimately reduces the costs associated with owning the shares of companies.
Faster transactions: Before demat accounts came along, it would take days to settle a stock market transaction. But now, every single buy and sell transaction is settled immediately after the end of the trading day.
Conclusion: Thus, if you are beginning your investment journey, it is important to understand all the aforementioned features of a demat account. This will give one clarity while placing trades and make processes much smoother.
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