The introduction of online trading has transformed how traders buy and sell securities in the stock market. There is no longer any need to trade and hold physical securities certificates. A demat account is all you need to store your shares, bonds, and other assets in one place.
‘Demat’ is the short form for ‘dematerialised’. Your demat account acts like a bank locker where you can store securities certificates in dematerialised or digital form. When you sell securities, you take them out of the demat account. When you buy securities, these get added to your account.
In India, demat accounts are controlled by two central depositories: the Central Depository Services (India) Ltd (CSDL) and the National Securities Depository Ltd (NSDL). The depositories allow depository participants like Kotak Securities to facilitate the opening and maintenance of demat accounts. You can open a demat account before you own any shares.
How demat accounts work
Demat accounts work in tandem with trading accounts. The two accounts must be linked for trading to take place.
To buy shares, you must first place an order from your trading account. After a successful purchase, the details of the shares will be updated in the demat account. The amount spent to buy the shares will be deducted from the trading account. To sell shares, a delivery instruction note is required. Once this note has been processed, the shares to be sold will be debited from the demat account. The money earned from the sale will be deposited in the trading account.
Benefits of a demat account
- Physical copies of shares in bond paper are no longer required. Soft copies of shares are safer and easier to maintain. The risks of losing share certificates by way of theft or damage due to flood or fire are eliminated.
- All securities owned by an individual are listed at a single location. The transaction records are easily accessible at the click of a button. This gives the investor the flexibility to trade on the go.
- In the digital format, shares are easy to buy and sell. Transactions are possible for even a single share. Demat accounts also help save money as the trader no longer needs to pay the stamp duties associated with physical share certificates.
