In India, a Demat account means dematerialized account for people to invest in securities online.
The investor opens a demat account while registering with an investment broker. This account number is used by the broker for all transactions that are used in online stock trading.
To access a demat account, the investor requires an internet password and a transaction password. This allows an initiation of buying or selling of securities on the demat account.
A demat account reduces brokerage charges considerably. It makes transfer of shares easier, enables quick ownership of shares by settlement resulting in an increased liquidity.
It also avoids confusion in ownership of securities and provides easy receipts for public issue allotments.
In the last 15 years, the capital market in India has witnessed an unprecedented boom. However, in the early 80’s a lot of paperwork and tedious maintenance meant that the common man kept himself away from the capital market.
Due to overwhelming number of paper shares they were becoming increasingly tedious to maintain and archive.
Problems like fake and stolen shares, forged signatures, mismatch of signatures, duplication of shares, transfer problems plagued the traditionally paper based trading and settlement system.
To top it all, the system had some very irritable procedures and an overdose of paperwork that made retail and institutional investors from entering the capital market. Investors felt that they were gaining less for the risks undertaken by them.
Lack of modernization in a large and inefficient system became a major hurdle to the growth of the Indian capital market.
Thus, Indian stock market adopted the Demat system for electronic bookkeeping where the securities are representated and maintained electronically. It erased the troubles that one would associate with paper shares.
After the introduction of the depository system by the Depository Act of 1996, the procedure for buying, selling and transfers of shares became much easier and most of the risks associated with paper certificates were eliminated.
Advantages of a demat account:
• Convenient, easier and safer ways of holding securities
• Instant transfer of securities
• Zero stamp duty on transfer of securities
• Less transaction cost
• Even a single share can be sold or purchased
• Flexibility for traders to work from anywhere
• A single demat account can hold both equity as well as debt investments
• Address change recorded with a DP will get registered with all companies in which the investor holds his securities, thus it erases the need to contact all of them separately and save time.
