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 credited.
Why should you have a Demat Account?
As per SEBI guidelines shares cannot be bought and sold in any form except in demateralised form. Therefore, if you want to buy and sell shares through the stock exchange, you necessarily have to have a demat account.
How does it 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
No hassles in keeping the shares in physical forms
No odd lot issues, and shares even one share can be bought and sold
No stamp duty on transfer
No transfer deed required