What is Demat Account and Dematerialization

What is Demat Account?

A demat account holds all the shares that you purchase in electronic or dematerialized form. Basically, a demat account is to your shares what a bank account is to your money. Like the bank account, a demat account holds the certificates of your financial instruments like shares, bonds, government securities, mutual funds and exchange traded funds (ETFs).

Understand How Does Demat Account Works

CENTRAL DEPOSITORY:

There are two depositories in India – the CDSL and NSDL. They hold all the demat accounts. The central depository holds details of your shareholding on your behalf like banks.
UNIQUE ID:

Each demat account has a unique number for identification purposes. This is the number you need to provide for transactions. The number will help the exchange and companies identify you and credit the shares in your account.
DEPOSITORY PARTICIPANTS:

Access to the central depository is provided by the Depository Participants or DPs. They act as the intermediary between the central depository and the investor. DPs could be banks, brokers or financial institutions that are empowered to offer demat services. 
PORTFOLIO HOLDING:The demat account holds all your securities. So, whenever you check your account, you can see your portfolio holding and its details. These are updated automatically every time you conduct a transaction – be is buying or selling a security.

What is Dematerialization?

Technology has brought about a drastic change in our everyday lives. The stock markets too have not been left untouched by the change. In 1875, the Bombay Stock Exchange was founded with an open outcry floor trading exchange. Traders would stand on the floor and shout prices of stocks for buying or selling. Then, money would be exchanged for physical receipts of the shares called the certificate. This led to a great amount of paperwork. Even the settlements of trade agreements took time because of the need to deliver the share  certificates.

Much has changed since.
In 1996, dematerialization was embraced. Dematerialization is the process by which physical share certificates held by an investor are converted into an equivalent number of securities in electronic form and credited into the investor’s demat account.

Benefits of Dematerialization

COMMON BANK:

Dematerialization is not just for shares, but also for debt instruments like bonds. Now, you can hold all your investments in a single account.
AUTOMATIC UPDATE:Since this is a common account, you don’t have to keep giving all your details like addresses every time you transact or every time you change the details. These details are automatically made available to companies you transact with.
ODD-LOT PROBLEM:Earlier, shares were transacted in lots. A single or odd number of securities could not be transacted. This problem is now eliminated.

DELIVERY RISKS:

Dematerialization has also eliminated the risks of fake shares, thefts, deliveries gone wrong, and so on, and reduced the paperwork involved. Time of delivery has also reduced drastically. Once your trade is approved, the securities are automatically credited to your account. This applies to other company-related activities like stock splits, stock bonuses, and so on.
COST REDUCTION:Earlier, when you transferred the securities, you incurred extra costs due to the stamp duty. This is not a problem with the demat form.

EASY TO HOLD:Paper certificates are vulnerable to tears and damage. In contrast, the dematerialized or demat format is a safe and convenient way to hold securities. You also have a nomination facility, whereby you can facilitate a transfer of shares in the event of your demise.