Every investor and trader is aware of the fact that a Demat account is crucial for trading. However, different things need to be explained about a Demat account. In the previous articles, you can find the meaning of the Demat account. In this article, we will explain many intricate details of this mandatory account for traders.
While most of you will know what a free Demat account is, understanding the details of this account is crucial. A Demat account is like a bank account where you hold your securities. If you invest in stocks, commodities, or debt instruments, all these are held in electronic format in the Demat account.
Demat comes from the word Dematerialization. As the whole process of stock market investment has gone digital, all the stocks you buy, get credited to the Demat account. There are no more paper or physical certificates against your share purchases. The share certificates are not digitally issued and stored in the Demat account.
The work of a Demat account is pretty simple. You buy securities, the order gets processed, and once the transaction is settled, the securities get credited to the Demat account. Here, the share certificates in digital format are held in this account. Now when you sell the securities, after the transaction is processed, approved, and cleared by the Depository, the Demat account gets debited with the securities you sold.
So, it works just like a bank where if you receive money, it gets credited, and if you pay, the money gets debited. However, these are just the basics of a Demat account. There is a lot more underneath that needs to be understood for a thorough understanding of the Demat account and its function.
So, in the above paragraph, you came across a word called dematerialization. Are you wondering what this word means? Is it related to the Demat account? Yes, it is the process of transforming physical share certificates into digitalized share certificates.
At present, if you buy shares, all share certificates will be issued digitally and stored in the Demat account. However, before the advent of technology and digitalization, there were physical share certificates. When the total process got digitalized, dematerialization of those share certificates happened. The word Demat has been derived from this phenomenon – Dematerialization.
You also have come across the word called Depository above. Do you have an idea what a Depository is? So, here is the answer. A Depository is an entity in the stock market that provides liquidity and security/safety in the market. The Demat accounts are opened in these Depositories only.
There are two depositories in the country – CDSL and NSDL.
If Demat accounts are to Bank accounts, then Depositories are the banks. So, Depositories keep the stocks, and other assets and make the transaction happen. When an order is placed from a trading account, the order is processed by the DP (which will be explained in the next section), and then the Depositories come into play.
They release the stocks, and after the completion of the transaction, the same is reflected in the Demat account. Depositories offer all the Demat services which you get from your DP from maintenance of the Demat accounts to trade settlement, share transfers, liquidity, dematerialization, nomination, transmission, and providing safety to the assets held in the Demat account.
Now, you must be wondering that if depositories are like banks and Demat accounts are like bank accounts, then who are DP? These are brokerage houses in the stock market, technically known as Depository Participants. They are like agents of the Depositories in the country. DPs are mainly responsible for trading accounts. They provide all the resources, tools, and facilities to the investors and traders to trade. Once the trade order is placed, the rest is taken care of by the Depositories.
You must have understood that a Demat account is necessary, and if you are wondering why, here is the answer. The Demat account links the trader/ investor to the Depositories. Without a Demat account, one cannot trade or invest in stocks because the Depository will not get the order to release the securities.
So, opening a Demat account is necessary because all your shares are now held in digital format in the Demat accounts in those depositories.
While the Demat account definition may be very easy, there is a lot more that goes into it. The whole process of trading includes the Demat account from start to end, and everything else is linked to this account. ???????