Demat account functions like a bank account, where your bank balance is a mere entry in the bank passbook and you do not hold the cash physically. Securities too are held in an electronic form (demateralised form), in a similar manner and debited or credited.
When you have to receive corporate benefits like dividends, the company gets the list of shareholders from NSDL and it credits your bank account with the dividend. Understanding demat accounts, hence, cannot get any simpler.
Why should you have a Demat Account?
As per guidelines from the Securities and Exchange Board of India, you cannot buy and sell shares in the physical form at the exchanges. What this means is that share certIficates, which was earlier the norm are not allowed to be traded. This means you need demat shares to buy and sell through the BSE or the NSE.
How do demat accounts work?
When you buy shares, the broker credits your demat account with the shares and these are reflected in your statement of holdings. If you are trading through an internet based platform, you can view your holdings online. Typically the broker credits the shares on T+2, that is trading day + 2 days after that.
When you sell the shares, you need to give your broker a delivery instruction note, where in you fill the various details of the stock sold. Your account is debited with the shares and you are then paid the money for the shares sold. If you are trading through the internet, the account will automatically reflect a debit of the shares and amount credit to your account.
There are two Depositories in India – the National Securities Depositories Limited (NSDL) and the Central Depository Services Limited (CDSL), through whom the shares are held by the various depository participants.
Benefits of opening Demat account
1) No worries in keeping the shares in physical forms
One of the biggest advantages is that you should not be worried that your shares would be stolen or damaged. In the elctronic form shares are very safe.
2) No odd lot issues, and shares even one share can be bought and sold
You can buy and sell shares in lots of 1 in the electronic form. You cannot do that in the physical shares. how can you sell 1 share, when you have a certificate that shows 5 shares.
3) No stamp duty on transfer
Stamp duty is paid at the time of buying and selling the shares. So, you really need not go the stock exchanges and buy physical stamps as was the case earlier.
4) No transfer deed required
Like stamp duty, there is no need for a transfer deed as well.
How many depositories are there for demat accounts?
There are mainly two depositories in the country who handle demat accounts. Your accounts are generally opened by the broker at the NSDL or the CSDL. They are than held in electronic form at these two depositories. When there is a book closure for payment of dividend or bonus they retrieve the data from the two depositories and pay dividends accordingly. All of the Depository Participants have to open a demat account either with the CDSL or the NSDL.