What is the meaning of dematerialisation? What are demat accounts? What constitutes a new demat account opening? And why are they increasing so rapidly in number? In this article, we will try to find the answers to some of these questions.

What is Dematerialisation and what are Demat Accounts?

Dematerialization is the process of replacing paper-based securities with electronic-based securities in finance. This is a type of indirect holding system in which a third party, such as a broker or a central securities depository, or the issuer itself, maintains an electronic record of share ownership. Any investor who wants to own securities such as stocks, bonds, or mutual funds in India must first open a demat account. "Demat” (meaning dematerialisation) is an abbreviation. A demat account is one that is used to keep electronic copies of one's shares and securities. National Securities Depository Limited and Central Depository Services Limited are the two depository organisations in India that manage demat accounts. Between the investor and the depository, a depository participant, such as a bank, functions as an intermediary.

Workings of a Demat Account.

A demat account functions similarly to a savings account. A demat account allows you to keep securities with an NSDL-affiliated depository participant, whereas a savings account allows you to save cash in electronic form with a bank. Shares or securities are credited to your demat account when you buy them, and they are subtracted when you sell them. A demat account is required if you intend to invest or trade in equities, ETFs, bonds, or other securities. SEBI mandates that all companies listed on the stock, commodities, and derivatives exchanges make their securities available in electronic form.

Popularity of Demat Accounts.

• There are many reasons for the gradual rise in the popularity of Demat Accounts. The risks associated with physical certificates are, of course, no longer a concern with demat accounts. Demat accounts can contain a wide range of investments, including stocks, ETFs, mutual funds, and government securities.

• They allow speedier and easier price discovery for any asset, as well as technical analysis. Moreover, they remove the risk of forged and false share certificates and lower transaction costs. Furthermore, SEBI mandates that all companies listed on stock, derivatives, and commodities exchanges make their securities available in electronic or demat form, making them easily accessible and widespread in use.

• Between April 2020 and January, new dematerialized or demat account additions reached an all-time high of 10.7 million, according to SEBI data.

• The increase in free time that many people had due to the run of statewide lockdowns imposed during the first part of FY21 is seen as one of the reasons for this dramatic surge. This increased leisure, combined with a huge rise in financial literacy (both due to government initiatives and an increase in information accessible online), proved to be the catalyst for people to learn about and participate in stock trading.

Conclusion

According to experts, technology such as e-KYC and Aadhaar e-signing helped the retail investor community flourish by providing smooth and quick access to stock markets. If you too wish to try your hand at the world of trading, you can do so by creating an online demat account with Motilal Oswal.

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