Demat means dematerialised account. It is an account with a bank opened by an investor wherein the shares and securities of an investor are deposited electronically instead of handing over these securities physically to the investor. It is compulsory to open a demat account if a person wants to buy or sell shares in India.
One has to approach the DPs to open Demat account. Here banks serve as Depository Participant (DP). A Depository Participant (DP) is an intermediary between the investor and the depository.
A DP is typically a financial organization like a bank, broker, financial institution, or custodian acting as an agent of the depository to make its services available to the investors. Each DP is assigned a unique identification number known as DP-ID.
As one buys and sells the shares, they are adjusted in Dmat account. The Dematerialized account number is quoted for all transactions to enable electronic settlements of trades to take place.
Every shareholder will have a Dematerialized account for the purpose of transacting shares and securities. Access to the Dematerialized account requires an internet password and a transaction password.
India adopted the Demat System eliminating the troubles associated with paper shares, after the introduction of the depository system by the Depository Act of 1996.
The process for sales, purchases and transfers of shares became significantly easier and most of the risks associated with paper certificates were minimized.
The 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, and provides easy receipt of public issue allotments.
It also helps you avoid bad deliveries caused by signature mismatch, postal delays and loss of certificates in transit. Further, it eliminates risks associated with forgery, counterfeiting and loss due to fire, theft or mutilation.
Demat account holders can also avoid stamp duty, avoid filling up of transfer deeds, and obtain quick receipt of such benefits as stock splits and bonuses.
The benefits of Demat account can be summed up as follows:
• Easy and convenient way to hold securities.
• Immediate transfer of securities.
• No stamp duty on transfer of securities.
• Safer than paper-shares (risks such as bad delivery, fake securities, delays, thefts etc. are mostly gone.)
• Reduced paperwork for transfer of securities.
• Reduced transaction cost.
• No “odd lot” problem: even one share can be sold.
• Change in address recorded with a DP gets registered with all the concerned companies.
• Transmission of securities is done by DP.
• Automatic credit into Demat account for shares arising out of bonus/split, consolidation/merger, etc.
• A single Demat account can hold investments in both equity and debt instruments.
• Traders can work from anywhere (e.g. even from home).