There was an era when stock investors had to deal with paper-based securities. They need to store their securities in a file that was somehow hassled to maintain and keep them safe. A demat account has helped stock traders to overcome this hassle as it allows them to hold all securities on an electronic device. It is a mandatory account to buy and sell financial securities, like, shares, bonds, mutual funds, etc., in the stock market. Let us understand what is demat account and its role in online trading.
What is a Demat Account?
A demat or dematerialised account is an online account with a stockbroker registered with a national depository. Every demat account has a unique identity.
This is a convenient way of storing your financial investments. It allows investors to hold financial securities in electronic format. This holds all your investments, whether it is about stocks, government securities, mutual funds, exchange-traded funds, bonds, etc and stores your securities online and allows you to access them using your demat account login credentials.
No one can trade in the stock market without a demat account. It facilitates you with all-time access to your investments in one place. Know where your investment portfolio is heading to meet your financial goals.
The Role of Demat Account To Buy/Sell Shares
Stock markets have been operated through an electronic system on stock exchanges since the mid-90s. Since then, all the trades in the stock markets have taken place electronically. It is called a demat-based trading system. You need a demat account and trading account to participate in online stock trading. Stockbrokers credit/debit your demat account with the traded securities by you.
A Demat Account is an online repository that allows investors to digitally hold their multiple investments in financial securities. Its storage function can be understood as a bank account’s function. In a bank account, you keep your money, and the account passbook is the record of the money. Similarly, your demat holds your financial securities electronically. The stock broker debits or credits the securities accordingly.
It facilitates the conversion of physical shares into electronic format to make investing and trading easier than ever. If you have old shares in paper form, you can convert them into dematerialised form. It is rare, but you can convert your demat securities into paper-based securities.
Investors are free from the botheration of holding paper-based securities in paper form. Earlier in the offline trading system, investors were burdened with the safety issues of physical certificates of securities. Demat account has eliminated such burden associated with share certificates because it has transformed all securities into electronic form.
As you know, the demat account works online, making the change of ownership, i.e. buy/sell, faster and easier. Like the offline trading system, investors need not wait long to get ownership of their securities. When an individual wants to buy or sell securities, they need to log in to their demat account and place an order using your trading account for demat securities’ transfer.
As a demat account allows you to store multiple securities, it makes it easy to track each of your securities. You can keep monitoring all your financial investments in one place.
Demat-based Trading Process
A demat, trading account, and bank account opened by an investor need to be interlinked to access the online trading system. When you purchase financial securities, your demat account gets credited, and the linked bank account will be debited with the transaction value. Your bank account will be credited with the trade value if it is a selling trade.
When you place a trade order on the stock exchange using your trading account, it locates an order with the same securities in the same number you want to buy or sell. Then your order is processed in the stock market.
The clearing house of the exchange clears the trade transaction after the successful match of trade orders, and your demat account gets credited or debited accordingly.
Benefits of Demat Account
Let us see what benefits a demat account offers to investors with its different functions.
Online demat account opening is a simple process. Following are the features and benefits of a demat account that encourage more investors to open a demat account and invest in the stock market, which has the potential for significantly high returns.
- Safe Investing: A demat account eradicates the possibility of theft, forgery, loss and damage of paper-based securities.
- Faster Transfer: It allows you to transfer financial securities immediately.
- Automatic Credit of Corporate Benefits: It allows you to receive bonus stocks, rights issues, split shares, dividends, and refunds etc., automatically.
- Easy Handling of Investments: Demat-based investing has made it easier to handle stocks.
- Anytime Investing: Investors can trade their demat securities using their smartphone or desktop. You need not visit the stock exchanges to trade your securities.
- Easy Tracking: Investors can track their investments and trading activities online.
- Reduced Investing Costs: Demat accounts benefit investors with reduced transaction costs. There is no stamp duty levied on the share transfer.
Get ready with a demat account to meet your financial goals. Make prudent investing decisions with self-learning and guidance of the broker, if needed. Approach a discount stock broker to open a free demat account.