How Your Demat Account Works?
Dematerialization eliminated the need for physical certificates when you invest in any kind of security. Historically, every time you bought or sold any financial product, the certificate needed to be sent to the issuer for name transfer. It was a long and cumbersome procedure. This lengthy process is no longer required as all securities are held in an electronic form.
A dematerialization account is similar to a regular bank account. You hold your cash in the account, which is reflected in the account statement, and you do not physically need to hold the money. Similarly, all your investments are held in an electronic form in your dematerialization account, thereby eliminating the need to physically hold these. When you buy or sell, the trades are automatically credited and debited in your account, respectively.
Another benefit of a demat account is that corporate actions are automatically updated in your account. For example, when a company declares a dividend or bonus, the same is directly credited to your account based on your holdings in the dematerialization account.
Why demat account opening is required
According to the Securities and Exchange Board of India (SEBI) regulations, every individual who wants to transact on the equity markets must hold a dematerialized account. Therefore, you need to undergo the demat account opening procedure before you can buy or sell securities on the stock exchanges.
Working of demat accounts
1. Buying securities
When you execute a purchase transaction, the broker credits your account with the number of securities purchased. This is reflected in your account holding statement. If you trade online, you can view your holdings on the Internet. Generally, the credit is reflected in your account based on the T+2 trade cycle. This means the securities are credited two days after the successful execution of the buy order.
2. Selling securities
For sell transactions, you need to provide a delivery information note to your broker. This form includes all the details related to the shares being sold. Your dematerialization account is debited, and the money is credited to your bank account. For online trades, the debit and credit transactions are automatically executed on the Internet.
Depositories and Depository Participants
There are two depositories in the country. These are the National Securities Depository Limited (NSDL) and the Central Depository Services (India) Limited (CDSL). Your account is opened with one of these depositories. To facilitate the transfer between dematerialization accounts, all the stock exchanges are linked to these depositories.
Depositories offer services through depository participants (DPs). They act as the intermediaries between the depositories and the investors. DP services may be offered by banks, brokers, financial institutions, and custodians,
The compulsory requirement of having a dematerialization account for investment has eliminated several risks associated with physical certificates. Delay in transfer, loss or damage in transit, forgery and bad deliveries, fake certificates, and theft are some risks that are eliminated when you hold your investments electronically.
So, open an account today and start investing now.