Demat account and stock market investing go hand in hand. The Indian stock market has come a long way since the time securities were held and traded in their physical form. Today, almost everything is traded online. According to the Securities and Exchange Board of India’s regulations, you must have a Demat account for investing and trading in the stock market. Before we understand why and when it is compulsory to have a Demat account, we should know what a Demat account is.
What is a Demat account?
A Demat account, short for Dematerialised account, allows you to hold your investments in the stock market in an electronic format. The online Demat account keeps your financial assets such as stocks, bonds, IPOs (initial public offerings), mutual funds, exchange-traded funds (ETFs), and commodities safe. A Demat account also helps you trade your securities quickly and hassle-free and eliminates the risks associated with storing and trading physical share certificates. The Demat accounts are operated by two service providers – the Central Depository Service Limited (CDSL) and the National Securities Depository Services Limited (NSDL).
When it is compulsory to have a Demat account?
Broadly speaking, if you want to invest or trade in the Indian stock market, you will have to open a Demat account. Specifically, you need an online Demat account for the following purposes:
• Settlement of trades and storing shares
A Demat account is needed for settlement of trades by delivery or receipt of securities from investors’ accounts. Your Demat account is a safe electronic storehouse for your shares and other financial assets invested in the stock market. Every time you buy a share from the National Stock Exchange (NSE) or the Bombay Stock Exchange (BSE), it gets credited to your Demat account after clearance from the exchange concerned. The shares remain in the Demat account until you sell them. When you sell a stock, it is debited from the Demat account. Besides holding the securities, a Demat account maintains a record of securities held by the investors in electronic form.
• Dematerialisation and Rematerialisation
Two things that for sure cannot be done without a Demat account are dematerialisation and rematerialisation. It is dematerialisation that the Demat account got its name from. Dematerialisation, as defined by SEBI, is the process by which physical certificates of an investor are converted to an equivalent number of securities in an electronic form. Similarly, the process of converting securities held in an electronic form in a Demat account back into the physical certificate form is known as rematerialisation. Dematerialised stocks or other financial assets are easy to store, access and trade.
• Transferring shares to other Demat accounts
A Demat account is a must for transferring shares or other financial assets electronically from one Demat account to the other.
• Benefits of corporate actions
If you have a Demat account, you get the benefits linked to your securities directly. The dividends, interest or refunds provided by the corporates are transferred to the investors through their Demat accounts. Similarly, corporate actions such as stock split, rights offer shares or bonus issues are updated in the shareholders’ Demat accounts.
Applying for IPOs:
You need a Demat account if you want to gain from the IPOs (initial public offerings). The Demat account is required both before the IPO is launched and after the company’s shares have been listed. When a company issues its shares to the public for the first time, we call it an IPO. An IPO allows a company to raise capital from public investors. Like it is a big event for a private company going public, an IPO is an opportunity for investors to earn substantial profit in one go. Small investors look forward to an IPO for a quick profit. According to the Securities and Exchange Board of India’s regulations, you need a Demat account for crediting shares allotted to you in an IPO. You will again need the Demat account if you want to buy the shares that have been listed in the stock market following the IPO. This is because after you buy shares in the stock market, they are transferred to a Demat account. So, in a nutshell, a Demat account is indispensable if you want to benefit from investing in the Indian stock market.