If you have a DEMAT Account, it will help you in various ways. It includes cost savings, reduced paperwork, reduced transaction processing time, and safe holding of all the investments. Even though dematerialization occurred in 1996, many investors and traders find it difficult to understand the technicalities of a DEMAT Account till now. The main reason behind is that many new investors or traders do not have a clear idea about how to buy shares using a DEMAT Account and how to use a DEMAT Account. This blog is all about the basic information about a DEMAT Account. The information mentioned in this blog may be useful for beginners as well as experienced investors to make them understand how to use a DEMAT Account.
What is a DEMAT Account?
The full form of a DEMAT Account is ‘Dematerialised’ account. DEMAT account came into existence after the dematerialization occurred in 1996 and the purpose of dematerialization is to eliminate the open outcry system of trading at the Bombay Stock Exchange (BSE) and convert physical share certificates into electronic shares. After dematerialization, each and every investor and trader is required to have a DEMAT Account and a trading account to hold financial securities in electronic form. DEMAT Account eliminates the risk of theft, scope of any forgery and loopholes in stock market trading. People are able to invest in the stock market by sitting at their offices or at their homes, with just one click on their computer mouse or on their mobile devices.
Why is a DEMAT Account required for trading?
As per the Securities and Exchange Board of India (SEBI), an investor or a trader is required to have a DEMAT Account for trading in the stock market and commodity market in India. Moreover, you are also required to have a DEMAT Account in your name only. Dematerialization was becoming a necessary measure to be taken because many investors, traders, or even brokers were indulging into frauds and malpractices in stock market trading. We’ve all heard about the Harshad Mehta scam in 1992. He had done a scam of approximately ₹5000 crores with the State Bank of India (SBI). This was the biggest scam ever in the history of the stock market. He had taken the utmost benefit of the loopholes in the stock market trading as no digitalization was there in 1992 and all the share certificates and Bank Receipts (BR) were supposed to exist in physical form. So, this was the major reason behind digitalization and the formation of SEBI so that no frauds and wrong practices can take place in stock market trading.
Using a DEMAT Account is an easy and simple process. But first of all, let’s discuss in brief about how to open a Demat Account.
- The first step toward the DEMAT Account opening is to approach a Depository Participant (DP) who will act as an agent to the depository (NSDL or CDSL).
- The second step is to fill out the account opening form along with submission of identity proof, address proof, PAN Card (Mandatory in every case), and a passport size photograph.
- The third step is to sign an agreement with the DP which includes all the duties and responsibilities of the trader as well as the DP. The fourth and final step in the DEMAT Account opening process is your DEMAT Account will be opened and you will be given your unique DEMAT Account number.
- This unique DEMAT Account number is also called Beneficial Owner Identification Number (BOID). This is the whole procedure of a Demat account opening with a broker/ sub-broker.
Now, let’s discuss the process of how to use a DEMAT Account
- Once you’ve got your unique DEMAT Account Number, you are required to link your DEMAT and trading account if you want to actually make use of your DEMAT Account. In addition to DEMAT and trading accounts, you are also required to have a stockbroker to carry out purchases and sales of shares on your behalf.
- Once you’ve got your DEMAT and trading account linked, you will be able to start trading and you will have to request for an order through your trading account.
- After requesting for an order, your broker will connect you to the trading exchange that is most relevant to you where your trade can be executed.
- At the trading exchange, your order will be processed after verifying various details regarding your order and your DEMAT Account.
- As soon as your order is processed, your Demat account will be debited or credited with the electronic copies of the shares you were dealing. It takes T+2 days for debit or credit shares to be reflected in a DEMAT Account after execution of the trade.
Opening a Demat account is an easy process. But to make it easier, you should have a basic knowledge about the usage of DEMAT and trading account. Without a DEMAT Account, you cannot trade in the stock market.