The word ‘Demat’ is the colloquial short word for ‘Dematerialized account’ which is a type of an account where shares and securities are held electronically to enable trading transaction & settlements in stock exchange, thereby eliminating the need of physical financial instrument.
It was in the year 1996 when it was first introduced in India after the introduction of the depository system by the Depository Act of 1996. It is mandatory for one to own a demat account with an investment broker linked to a savings or other funded account, if he/she wants to participate in the stock market trading.
The interested candidate need to approach a Depository participant (DP) which acts as intermediaries between the trader/investor and the depository. A DP will be registered with the Central Depository Services Ltd. (CDSL) and the National Securities Depository Ltd. (NSDL) of the country.
The DPs are basically the stock broking firm, bank or sub- broker etc, with whom one needs to get registered, which needs some identity proofs and other documents for verification and on its completion provides the trader with login credentials and transaction passwords upon whose confirmation the transfers or purchases of shares can then be initiated.
One can operate the transaction of buying/selling of shares by own or through broker personally or online from their demat account. The broker then provides the candidate with transaction password to carry out the share trading processes. It is possible for a person to hold more than one demat accounts.
Share trading using demat account involves inward and outward brokerage, which varies from broker to broker and on trading style whether intraday or delivery.
Features of demat account:
- Easy accessibility and mobility in stock trading.
- Utmost security is ensured whilst trading debarring loss, forgery or theft of the certificates.
- Reduced paperwork and minimizing the risks involved with it.
- No stamp duty is required on transfer of shares and lower cost per transaction than physical trading.
Difference between Demat account & Trading account
It is often observed that people either confuse the word “demat account” and “trading account” or use it interchangeably, which actually happens to be entirely two different terms. Here let us see how:
- Demat account only allows investor to store share and securities in an electronic form, whereas Trading account is used to place buy or sell orders in the stock market.
- Demat account holder needs to pay annual maintenance charges which isn’t the case in trading account.
- For one to have demat account it is mandatory to get an approval of SEBI & NSDL for opening an account, but in case of trading account its not required.
- Demat account is useful for those who are interested to invest in stock market only, whereas trading account is meant to be suitable for derivative segment traders mostly like commodities, index, currency futures, options etc.
Thus, people who are inclined towards dealing in share and securities in the secondary money market in the country should make sure he/she is fully aware of its root level knowledge, in order to discover wealth shore with wit and not fluke.