With the coming of age of advanced technology, there have been introductions of so many incredible inventions that have completely changed our lives. It has touched almost all aspects of our lives, including how we earn our livelihood. We want to make money easily yet effectively. Here enters the new age stock market. When the stock market was first started, traders had a different way of trading. But in 1986, when dematerialization came into play, things changed massively.
What is a Demat Account?
A Demat or dematerialized account is an account that enables you to hold your financial securities in an electronic format; just like if you have a savings account in a bank that you use to keep or hold your cash, you can use a Demat account to hold your stocks or shares. However, a Demat account transforms the material shares into an electronic form, thus dematerializing them. The Demat account is essential to hold your financial securities, such as debt or equity, in a digital form and to market shares in the stock market.
Demat accounts in India are maintained by two depository associations, which are the Central Depository Services Limited (CDSL) and National Securities Depository Limited (NSDL). You will be provided with an account number when you create a Demat account. You can use the account number for all transactions or marketings to facilitate electronic settlements of exchanges.
It is a digitally operating account that can be used to hold your dematerialized assets, comprising mutual funds, stocks, exchange-traded funds ETFs), bonds, etc.
How does Demat work?
Demat accounts are operated by entities such as bank subordinates, brokerage corporations, or group organisations known as Depository Participants or DPs. These DPs function as the negotiators between the customers and the two main depositories in our country, The CDSL, and NSDL. Creating a Demat Account with one of the DPs will allow you to hold your stocks in electronic form.
A depository partaker, such as a bank, behaves as an intermediate between the customer or investor and the depository. They are the mediators between the investors and the depository. The association between the depository and the DPs is regulated by an agreement made under the Depositories Act. You’ll require an internet password and a transaction password to access your dematerialized or Demat account. Only then transfers or buying and bargaining of securities will be initiated. Security, in this case, is a tradable monetary asset. Buying and selling securities on the Demat account are automatically rendered once the transactions are verified and finalised.
Types of Demat Account
There are mainly three different types of Demat accounts in India.
- Regular Demat Account
Regular Demat account is for citizens of India and is provided by central depositories such as the Central Depository Services Ltd (CDSL) and the National Securities Depository Limited (NSDL) through stockbrokers, intermediates, etc.
- Repatriable Demat Account
A repatriable Demat account benefits non-resident Indians (NRIs) who want to capitalise or invest in the Indian stock market. To have this account, they also require a related NRE bank account. Also, just like a normal Demat account, it can have joint owners, but they should be citizens of India.
- Non-Repatriable Demat Account
Non-Repatriable Demat account is also for non-resident Indians (NRIs). However, you cannot transfer funds outside the country through this account. This account needs a linked NRO bank account, and through this account, NRIs can conveniently organise their finances.
Benefits of having a Demat Account:
You’ll require a Demat account to buy, hold, and sell securities and stocks. Here are some key advantages of having a Demat account.
1. Simple Tracking- An important benefit you receive if you create a Demat account is that you require mainly paperless and minimum documentation. The number of physical documents is almost nil. Therefore, it reduces the struggle of keeping track of each of them. Hence, you are not required to keep a record manually. All the documentation is securely held along with the record of each transaction.
2. Preventing forgery – The risk of fraud is typically very high when it comes to physical bonds or shares. However, in terms of using a paperless Demat account, you can have all the important details and original data in your account, therefore preventing impersonation or forgery.
3. Cost-Effective – Another distinct benefit of online transactions is cost reduction. Likewise, if you choose to create a Demat account online, it can reduce the expenses like handling fees, stamp duty, etc essential for physical bonds. The only fee you have to pay for a Demat account is brokerage. Even that can be reduced if you opt for discount sellers and you will be able to save more money.
4. Loan Facility – In addition to using your Demat account as a safe deposit for your money, you can also access several bank loans through the assets stored in your Demat account. The securities can be used as collateral for getting a loan from your preferred bank.
Can you invest in the stock market without creating a Demat account?
A Demat account is a crucial factor needed to invest and trade in the share market. However, sometimes people get confused about whether they can start investing in the stock market or not without having a Demat account. For those people, we’re going to give the answers to their questions.
In theory, yes, it is possible that you can invest or trade without a Demat account.
For example, when you purchase the stakes of a company, they get transferred to your Demat account after two days of the transaction. So, if you purchase the stakes today, they will be credited to your Demat account after 2 days. So, if you purchase and sell the stakes of a company on the very same day, also referred to as the intraday trade, you won’t be attaining any shares or stakes into your Demat account as you’ve already sold them. In this way, you can possibly elude your Demat account entirely and use only your trading account.
But, practically is this possible?
Even if it is theoretically possible to invest and trade without a Demat account, it is not practical. Some stock brokers normally don’t permit you to open a broking account online without creating a Demat account first.
A major reason is that the intraday trades must be completed before the trading session ends. If the users cannot complete an intraday trade, the shares they bought will be automatically transferred to their Demat account. If the investor does not have a Demat account, it will hinder this process and cause an unnecessary problem. Therefore, stock brokers emphasise creating a Demat account and an online broking account to make things easy.
In conclusion, whether you utilise your Demat account or not, if you want to invest and trade in the stock market, it is better to create a Demat account.