Traditionally, people used to hold their shares in physical form by holding a share certificate. A share certificate is a proof that you are holding a said number of shares of a particular company. In 1996, the Demat account was introduced in India to enable you to hold your shares in electronic or dematerialized form without any involvement of paperwork. In this article, we are going to learn about what is a Demat account, how a Demat account works, and the key functions of a Demat account.
What is a Demat account?
A Demat account allows you to hold securities such as stocks, bonds, mutual funds, ETFs, etc in an electronic form. Having a Demat account reduces the risk of theft or loss of your shares. A Demat account holds all the information related to the transaction of shares, owned shares, and records. You can track or access your investments and trade any time you want. Demat accounts are managed by two depository institutions in India, NSDL (National Securities Depository Limited), and CDSL (Central Depository Services Limited).
Key functions of a Demat account are:
- Seamless transfer of shares: Investors can transfer shares without having to wait with the help of a Demat account. The whole process of transferring shares becomes easy, quick, and seamless.
- Easy Dematerialization of securities: The Demat account holder can freeze their Demat account for a certain number of days. Also, the account holder has the right to freeze particular securities. Freezing of the Demat account put a stop to debit and credit transactions.
- Loans on securities: A Demat account holder can pledge his securities to avail of loan benefits. You can ask for a loan from a bank against your shares held in the Demat account.
- 24/7 access: The Demat account holders can access all the information related to all their investments by logging in to their credentials.
- Low transaction costs: When you open a Demat account, you have to give account opening charges. Demat account charges in the range from INR 0.5 to 1 for each transaction.
- Automatic credit of dividends and other benefits: The Demat account holders automatically receive dividends and receive shares of a company in case of a merger of two or more companies, and when a company declares a bonus.
To conclude, the Demat account allows you to hold your shares electronically or in dematerialized form. Opening a Demat account is the first step to starting your investment journey. However, you should keep in mind that the stock market is associated with high risk and you may lose your money if you don’t follow the right strategy. So, before investing in any financial instrument, invest in yourself by reading books on the stock market and taking courses. Also, understand what is a Demat account, how it functions in the stock market.
