All that you wish to know about DEMAT Account
Bombay Stock Exchange came into existence during the British Era in 1875 with an open outcry floor trading policy. During the olden days, traders used to stand on the floor and shout prices of stocks for buying or selling. The money would then be exchanged for physical receipts of the shares called the “Share certificate” which also involved the time consuming process of delivering these certificates. It was in 1996 when the Government of India embraced the process of dematerialization 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 account. This account is known as “DEMAT” Account
The article will give you insights about the need for dematerialization process, benefits of demat account, how does it work and how to open an account
Why there is a need for Dematerialisation?
In the late eighties, the sheer complexities of the paperwork involved in the share market always kept the common man miles away from the stock trading process. This resulted in low mobilization of funds in the market. The paper work had also started appearing as major gamble with duplication of share certificates, fake shares, fakes signatures and transfer problems, thefts etc.
In nineties, when congress government initiated the financial reforms, it was realized that the tedious paper work system will be unable to keep up with the rapid pace of the growing economy. A more technologically equipped system was required to maintain the records of all the transactions. Therefore, Government of India decided to bring a fully automated system to eliminate the risky, lengthy and tedious process of paper based share certificates. A depositary system was introduced by the Depositary Act, 1996 which eliminated the paper based system and paved way for secured electronic system for the share market investors in making safe transactions through the DEMAT Account
Benefits of Dematerlisation
Let’s have a look at some of the Benefits of Demat Account
- Elimination of paper work reduced risk of duplication of share certificates, fake shares, fakes signatures and transfer problems, delivery gone wrong, thefts etc
- Time and Energy Saving Medium
- Fully integrated and secured electronic system for the investors
- Dematerialization comes as your one stop shop of equity shares, mutual funds and IPOs etc. under a single umbrella.
- 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
- Reduced cost and paper work being incurred by company while issuing and distributing shares
- Saving of extra costs incurred on stamp duty while transferring the securities
- Instant advantages of the split, merging and consolidated shares being credited automatically to your Demat account
How does Demat Account work?
Demat account is an account which holds all your shares in electronic or dematerialized form. Just like your bank account, a demat account holds the certificates of your financial instruments like shares, bonds, government securities, mutual funds and exchange traded funds (ETFs). India has two depositories NDSL and CSDL which stands for National Securities Depository Limited and Central Depository Services Limited that hold all the demat accounts. Each demat account has a unique number for identification purposes. This is the number you need to provide at the time of the transactions. Access to these depositories is given to the Depository Participants (DPs). DP’s are the intermediary between the central depository and the investor. DPs could be banks, brokers or financial institutions that are empowered to offer demat services for trading. So when you open a Demat account or a Beneficial Owner (BO) accounts with a DP, it will provide you with unique access to the central depository for trading. Demat account holds all your securities, you can keep a track of the quantity of scripts that you have purchased along with every detail that you wish to know about your shares. It keeps updating automatically every time you do a transaction – be is buying or selling a security.
How to open a Demat Account
To open a Demat Account you need to approach Depository Participants or DPs who could be banks, brokers or financial institutions that are empowered to offer demat services for trading. You will need to fill an account opening form and submit along with copies of the required documents, a passport-sized photograph and a PAN card proof. Once applied, you’ll be given a copy of the rules and regulation, terms of the agreement and the charges incurred for regular maintenance of your demat account. Depository Participants fees are based on the kind of transaction (buying or selling) that you perform. While some DPs charge a flat fee per transaction, others peg the fee to the transaction value, and are subject to a minimum amount. DP also charges a fee for converting the shares from the physical to the electronic form or vice-versa. Once the application is processed, the DP will provide you with an account number or client ID. You can use the details to access your demat account online. Every time you call for a trade you need to provide the client ID to the DP for further execution of orders.
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