Demat Accounts: Benefits, Key Elements & Differences from Trading Accounts
Managing your finances, such as equity or debt, can be troublesome given the tasks you do every day. The Depositories Act of 1996 has made it easier for everyone to manage their financial securities in a few clicks. Instead of getting physical copies of shares or other securities, a Demat account helps you take advantage of the benefits of an online trading platform where you place your financial securities on standardized electronic systems.
In 1996, the Indian government introduced the Demat account, mandatory for financial securities dealing, in response to the growing need for electronic trading platforms.
What is a Demat Account?
A Demat account is used for a 'non-physical' account, which means your shares, stocks, bonds, and other financial securities are now available in electronic form instead of the 'physical' or hard copy form.
A Demat Account Can Hold The Following Series Of Securities:
1. Share
2. Stocks
3. E-Gold
4. Bonds
5. Government Securities
6. IPO
7. Exchange Traded Funds
8. Non-convertible debentures
9. Mutual funds traded in the stock market
You Can Think of a Demat Account Like Any Other Bank Account:
The account displays credit, debit, balance, and transaction history, allowing electronic financial management with no limit on holdings and allowing zero balances from opening to maintenance.
Benefits of a Demat Account
Technological advancements made over the years have led to many benefits of having a Demat account:
1. Traders can transact at their convenience, making it convenient and time-saving.
2. No tedious paperwork is required to register a transaction.
3. There is no risk of theft, delay, or fraud of physical copies of share certificates, bonds, etc. as the securities are stored in electronic form.
4. You have an integrated platform to hold debt as well as equity instruments.
5. Automatic credits are registered in a Demat account in case of bonus, split, merger, consolidation, etc
6. Eliminates multiple communication requirements: For each stakeholder to be informed through electronic alerts about transactions to remove the need to contact the company, the businessman, and the investor.
7. The address change is updated with each company invested by the investor through the depository participant.
8. Unlike earlier, when shares were transacted only in lots (many simultaneously), now a share can be bought or sold.
9. The removal of stamp duty costs, which were otherwise previously attached to physical records of securities, has resulted in a significant reduction in the cost of business.
Key Elements of a Demat Account
The four key elements are:
1. Depository: India is operated by two authorized depositories, namely the Central Depository of Securities Limited and the National Depository of Securities Limited, both of which hold pre-verified shares electronically.
2. Depository Participant (DP): SEBI-registered financial institutions can act as depository agents, carrying out investor transactions through a depository service medium (DP), assigned a unique code by SEBI. DPs can include various financial institutions.
3. Investors: An investor is a person who owns securities. In this case, the person holding the Demat account is an investor.
4. Unique ID: Each Demat account has a unique 16-digit identification number that ensures smooth and transparent processing of securities.
Features Available with Demat Account
A Demat account is not only used to hold your financial securities; it can also be useful in many other tasks:
1. Investment Transfer:Account holders can transfer their entire or part of their holdings to another person by filling out a delivery instruction slip with accurate information.
2. Dissection:Investors can convert physical securities records into electronic form through dematerialization, requiring a Demat request form and original certificate submission to a DP..
3. Mortgage for Loans:Securities holdings can be used as value mortgages when applying for a loan.
4. Corporate Actions:Demat accounts link securities to the company, notifying investors of equity splits, bonus issues, and other company actions.
5. Freeze the account:This facility allows investors to freeze their Demat account if they anticipate unpleasant activities, similar to blocking a bank account or a credit card.
Difference Between Demat and Trading Account
A Demat account stores financial instruments like shares, ETFs, and mutual funds, while a trading account facilitates their purchase. Demat accounts have annual maintenance charges, while trading accounts function like e-commerce platforms.
Conclusion
The Depositories Act of 1996 introduced the Demat account, enabling electronic storage of financial securities, eliminating physical copies and reducing paperwork, offering convenience, and reducing communication requirements.
