Demat account can be termed to be the short form for a dematerialized account. In India, all securities and shares are held in an electronic format and in order to do so, a Demat account is mandatory. An investor will not have to take a physical possession of all the certificates. A Demat account is opened without much difficulty by an investor and this is done during the process of registering with a particular investment broker. There is also an account number for the Demat account and it is quoted for all the transactions in order to enable all electronic settlements of trades that can easily take place. Each and every shareholder can have a Demat account for the sole purpose of transaction of shares. These accounts are used under high security as there are transaction passwords as well as internet passwords. It is necessary to comply with all these password requirements. By using this account, you can initiate the purchase and transfer of securities. These sales and purchases are made automatically once a transaction is completed and also confirmed by the end user.
The advantages of having a Demat account
There are many advantages that one can enjoy while having a Demat account in possession. Some advantages have been stated below for your understanding.
The rights of all the shares as well as bonus to an investor are credited immediately to his or her account.
There is also very minimal risk as there will not be any loss because of mutilation, theft and fire.
The transaction costs are also much lower than the cost that can arise because of a physical segment.
The problems associated with a physical share certificates can also be avoided easily.
The risks associated with forgery are also eliminated successfully.
As the stamps are stored in an automatic format, as a Demat account holder, you can save a lot of money during the entire process. This is one of the biggest advantages.
The system of Demat and its goals
The Demat system was adopted by India for the storage of securities and shares in an electronic format. These are typically maintained and represented electronically. This eliminates a lot of troubles that are associated with the shares that are on paper. After the depository system was introduced because of the Depository Act in 1996, the process of transfers, sales and purchases have become very easier significantly. All the risks that were associated with the certificates on paper have been mitigated successfully. During the year of 1996, the trading began successfully on the National stock exchange for all the shares that were held in the Demat account form. This began a new era of trading stock in a paperless manner. In case an investor purchases a share today, it will get credited to the account of an investor in just two days. These days it is simply transferred to the Demat account of an investor.
The benefits of a Demat account
The benefits of a Demat account are numerous. Some popular benefits have been listed below.
It is a convenient and easy way to hold your securities.
There is an immediate transfer of all securities.
There is no requirement of stamp duty or securities transfer.
It is a lot safer than having paper shares.
There is a much reduced paperwork for the transfer of any securities.
There is a reduced cost of transactions.
Even one share can be sold as there is no problem related to odd lot.
Amy change in address is recorded with the help of a DP. This then gets registered with all the companies that an investor is holding his or her securities. Thus there is no need to correspond with each and every one of them in a separate fashion.
The securities are transmitted into a Demat account by a DP. This easily eliminates the need for notification of companies.
There is an automatic credit into the Demat account for all the shares that arise out of merger or split and bonuses.
Both equity and debt investments can be held by using a single Demat account.
The traders can easily work from anywhere in the world including home.
Benefits to the company, investor and brokers
The cost of new issues is reduced significantly because of the depository system. There is a much lower cost of distribution and printing. Thus this increases the efficiency of the registrars as well as all the transfer agents. The secretarial department can also gain a lot because of Demat account. This provides much better facilities for the purpose of communication and a timely service to all investors and shareholders.
On the other hand an investor also gains a lot as he or she does not have to hold any physical certifications. Thus there is no loss due to forgery, theft and mutilation. An investor can ensure that the transfer settlements are done in a good manner. There is also a much faster communication channel between and among investors. This helps in avoiding all the bad deliver problems due to differences in signatures. Faster payment can also be an added benefit to the investors as everything can be done through the click of a mouse.
Broker can benefit as the risk of delayed payments in reduced significantly. There is a much greater profit because of a significant increase in the volumes of trading. The chances of bad deliver and forging are also eliminated. The over all probability and trading also increase. The investors gain more confidence in the brokers.
The process of Demat conversion
The process of converting all the records related to investments into an electronic record is simply called as ‘dematerializing of the securities’. In order to do so, an investor must duly fill in a DRF which is a Demat request form. This form is available with the DP. After filling in this application form, a potential investor can submit the form along with all the physical certificates. Each and every security has an ISIN number. This is the International Securities Identification number. It is essential to fill in a separate DRF with each of the ISINs. The entire process has been stated below briefly.
An investor must surrender all the certificates for the process of dematerialization to the DP.
The DP also updates the account of all the investors who are going through the process.
The options included in Demat
There are several options for the interested users. This is because there exist hundreds and thousands of DPs (Depository participants). These DPs offer the facility of Demat account in India. This was started in September 2011 and has continued successfully since then. Users can face certain distinct advantages by having a bank as their DP. Having a particular Demat account with a DP of a bank can usually provide very quick accessibility, processing, online transaction and convenience to a particular investor. Generally most of the banks credit a Demat account with the help of shares in case there is a purchase. These banks can also credit the savings account with the help of proceeds that are received when a sale has been completed. Banks are also very advantageous because there are many branches present. Some of the banks give a good option of opening a Demat account in any particular branch and others can also restrict themselves from selecting a particular set of branches. The good thing is that there are bank branches that are capable of providing online access to the Demat account. Thus users can access them on the go and sell as well as invest. This service is mostly provided by all the private banks. Thus the investors can very conveniently check all the details online and these details include transaction details, holding details and various status requests. Any particular broker who acts as a DP will not be able to provide all these services.
There are also some disadvantages associated with a Demat account. These disadvantages are as follows.
The trading of securities can become quite uncontrolled in case of all the dematerialized securities.
It is quite incumbent upon the regulators of capital markets to keep a very close watch on the trading in securities that are dematerialized. It is not very easy to see whether the trading is detriment to the investors or not.
The role of all the key market players such as various stock brokers also has to be supervised regularly. This is because, these stockbrokers have the great capability of manipulating the entire market.
The agreements are entered at various levels during the process of dematerialization. All these levels can cause a lot of worries to an investor who is desirous of going through a simple situation and not a complex one.
There is also no provision to close your Demat account when it has illiquid shares. Thus an investor cannot close an account and he as well as his successors have to go on paying all the charges to a particular participant.
Even though there are certain disadvantages, the number of advantages obviously outnumber these advantages.