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What Is A Demat Account - Meaning Of Demat Account: Its Features & Benefits

17 Jan 2023

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?’ 

Demat Accounts -Things to Know

Demat accounts have been around for a while now, and most people know what they are, in a very general and basic sense. However, some individuals are still unclear about specific Demat account nuances and, therefore, hold themselves back from opening one. Is this account like a bank account? In a way, it resembles a bank account. If you wish to trade in the stock markets or invest in other securities like debentures, a Demat account suits your purpose perfectly. In fact, the regulatory body that determines the rules for trading and investing in the markets, SEBI, or the Securities and Exchange Board of India, has made it necessary for all investors of the stock markets to open Demat accounts. They not only facilitate transparency which is what SEBI aims for but the ease of seamless transactions done quickly and easily online. According to reports in leading newspapers, Demat accounts have jumped in number, with 10.4 crore Demat accounts reported at the end of 2022 (Demat accounts in India cross 10 crore for the first time - Times of India (indiatimes.com). This should give you some idea of how many Indians see Demat accounts as fruitful ways to start their foray into the markets. It is important to note that people from Tier 2 and Tier 3 cities are jumping on the bandwagon of opening accounts too. 

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). Demat accounts are not opened by these two depositories directly by an individual. Rather, a DP (depository participant), which is your bank or your broker, opens a demat for any individual on their behalf through these two depositories. Authorized brokers and banks are the bodies that can do this. A Demat account 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 an online Demat account, 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

Demat account meaning must have become clearer now that you’ve seen the features of Demat accounts. It is time to 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.  
  • Easy Account Opening Process Online: Opening a Demat account is easy on any portal of a bank or brokerage today. You can just create an account within an hour or less, by going through a convenient menu-driven procedure. Your documents can be uploaded, and your verification is done, all from the comfort of your own home. In this way, your journey into the markets can begin fast. 
  • 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. In case you are still wary of having your holdings held in a digital safe like a Demat account online, you can always hold physical shares, but you will face hassles with these. As your trading and investing are done online too, you can be assured that there is security and transparency in online transactions with any Demat account you open with a reliable broker like Motilal Oswal. 

 

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