Demat Account Demystified

By BankBazaar | October 31, 2017

With a demat account, you can trade in stocks and shares. But, there are plenty more advantages to having this account. Read all about them in this article.

Dematerialisation (DEMAT) is the move from physical certificates to electronic book keeping. Actual stock certificates are slowly being removed and retired from circulation in exchange for electronic recording.

The advantages of dematerialisation outweigh its disadvantages and the changes ushered in by SEBI (Securities Exchange Board of India) and the Central Government in terms of compulsory dematerialization of securities is important for developing the securities market to a degree of advancement.

Freely traded securities are an essential component of such an advanced market and dematerialization addresses such issues, and is a step towards the advancement of the market.

Additional Reading: Demat Account 101

Indian Stock Market

Today, where everything comes to our door step from grocery, jewels, electronics, real estate, automobiles, to even banks, so why not the share markets?

The Indian capital market has seen a boom in its activity in the last 15 years in terms of number of stock exchanges, listed companies, trade volumes, market intermediaries, investor population, etc.

This surge in activity has brought with it numerous problems that threaten the very survival of the capital markets in the long run, most of which are due to the large volume of paperwork involved and paper-based trading, clearing and settlement. Until the late eighties, the common man kept away from the capital market and thus, the quantum of funds mobilised through the market was meagre.

The Indian markets were drowned in shares in the form of paper and hence it was problematic to handle them. Fake and stolen shares, fake signatures and signature mismatch, duplication and mutilation of shares, transfer problems, etc. The investors were scared and were under-compensated for the risk borne by them. The century-old system of trading and settlement requires handling of huge volumes of paperwork which made the investors, both retail and institutional, wary of entering the capital market.

Additional Reading: Why Millennials Should Not Fear Investing In The Stock Market

Reforms in the Indian Stock Market

However, lack of modernisation become a hindrance to growth and resulted in creation of cumbersome procedures and paper work. The real growth and change occurred from mid-eighties in the wake of liberalisation initiatives of the Government. The reforms in the financial sector were made in the banking sector, capital market, securities market regulation, Mutual Funds, foreign investments and Government control.

Institutions and stock exchanges experienced that the certificates are the main cause of investors’ disputes and arbitration cases. Since the paper work was not matching the rapid growth, there was a need for a better system to ensure removal of these impediments.

Hence, the Government of India decided to set up a fully automated and high technology-based model exchange that could offer screen-based trading and depositories as the ultimate answer to all such reforms and eliminate various bottlenecks in the capital market, particularly, the clearing and settlement system in stock exchanges.

Additional Reading: Investment Tips: Should You Consider Stocks or Mutual Funds?

What is a Demat Account?

The term Demat Account, in India, refers to a dematerialised account. For individual Indian citizens to trade in listed stocks or debentures the Securities Exchange Board of India (SEBI) requires the investor to maintain a Demat account. In a Demat account shares and securities are held in electronic form instead of taking actual possession of certificates.

A Demat Account is opened by the investor while registering with an investment broker (or sub-broker). The Demat account number is quoted for all transactions to enable electronic settlements of trades to take place.

Access to the demat account requires an internet password and a transaction password as well as initiating and confirming transfers or purchases of securities. Purchases and sales of securities on the Demat account are automatically made once transactions are executed and completed.

Additional Reading: Eye-Opening Facts About Demat Accounts

Advantages of a Demat Account

  • A demat account reduces brokerage charges.
  • Makes pledging/hypothecation of shares easier.
  • Enables quick ownership of securities on settlement resulting in increased liquidity.
  • Avoids confusion in the ownership title of securities.
  • Provides easy receipt of public issue allotments.
  • Helps to avoid bad deliveries caused by signature mismatch, postal delays and loss of certificates in transit.
  • It eliminates risks associated with forgery, counterfeiting and loss due to fire, theft or mutilation.
  • Avoids stamp duty (as against 0.5 per cent payable on physical shares), avoid filling up of transfer deeds, and obtain quick receipt of such benefits as stock splits and bonuses.
  • Change in address recorded with DP gets registered with all companies in which investor holds securities electronically eliminating the need to correspond with each of them separately.
  • Automatic credit into demat account of shares, arising out of bonus/split/consolidation/merger etc.

 

Limitations of a Demat Account

  • Trading in securities may become uncontrolled in case of dematerialised securities. This can become an addiction for margin traders / day traders.
  • It is incumbent upon the capital market regulator to keep a close watch on the trading in dematerialised securities and see to it that trading does not act as a harm to investors.
  • The role of key market players in case of dematerialised securities, such as stock-brokers, needs to be supervised as they have the capability of manipulating the market.
  • Multiple regulatory frameworks have to be confirmed to, including the Depositories Act, Regulations and the various By-Laws of various depositories.

 

However, the advantages of dematerialisation outweigh its disadvantages and the changes ushered in by SEBI and the Central Government in terms of compulsory dematerialization of securities is important for developing the securities market to a degree of advancement. Freely traded securities are an essential component of such an advanced market and dematerialization addresses such issues and is a step towards the advancement of the market.

Additional Reading: Your First Steps To Investing In The Stock Market

Benefits from Demat Account

Benefit to the Company

The depository system helps in reducing the cost of new issues due to less printing and distribution cost. It increases the efficiency of the registrars and transfer agents and the Secretarial Department of the company. It provides better facilities for communication and timely services with shareholders, investor etc.

Benefit to the Investor

The depository system reduces risks involved in holding physical certificated, e.g., loss, theft, forgery, etc. It ensures transfer settlements and reduces delay in registration of shares. It ensures faster communication to investors. It ensures faster payment on sale of shares. No stamp duty is paid on transfer of shares. It provides more acceptability and liquidity of securities.

Benefit to Brokers

The depository system reduces risk of delayed settlement. It ensures greater profit due to increase in volume of trading. It eliminates chances of forgery or bad delivery. It increases overall of trading and profitability. It increases confidence in investors.

Thus, the demat account is a win-win-win for all concerned. However, if the demat account isn’t something you’re looking for at the moment then we have a bunch of other financial products to offer you. Care to check them now? Simply click on the button below.

Additional Reading: 4 Thoughts If You’re Looking To Invest In The Stock Market Today

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