A Dematerialized Account, more commonly known as a Demat Account, is a prerequisite for investors looking to trade in stock markets. First introduced in 1996 by the NSE as Indian stock exchanges made the switch from physical to electronic trading of securities, Demat accounts enable traders to hold their various shares and securities such as bonds, government securities, and mutual funds digitally and securely in one place.
Simply put, the way the system works is that stock market investors use funds available in their bank account to make purchases at the stock exchanges using a trading account. Once purchased, these securities are then stored in their Demat account in electronic form.
In today’s times, a Demat account is an indispensable tool for traders since all stock trading is done electronically, and it is mandatory to have one to be able to trade publicly listed shares on any stock exchange in India. Luckily for them, the entire process to open a Demat account can now be carried out online, in a matter of around 5-10 minutes.
The significance of Demat accounts in the modern, digital age of stock trading cannot be understated. Here are the 3 main reasons why a Demat account is so important:
Multiple types of securities
All in one place with the diverse range of securities available on the market today, it can get very confusing and inconvenient for investors to maintain separate accounts for all the different financial products that they own. A Demat account solves this by enabling investors to store them all – equity shares, exchange-traded funds, mutual funds, bonds, and government securities, in one single account. Not only does this make it much more convenient for them to keep track of their investments, but it also helps them to have a better, more comprehensive view of their overall investment portfolio. Additionally, it also simplifies the entire process of receiving benefits of all corporate actions by automatically accruing all dividends, interests, and/or refunds arising from securities owned directly in the user’s Demat account itself.
Safety – Secure holding of securities
Demat accounts store all securities in electronic form, which was not the case in earlier times when they were stored in the form of physical certificates. These were not only difficult to store and handle, but they were also risky as they could be easily misplaced, damaged, or even stolen. However, this is not the case with Demat accounts, which possess multiple layers of security and are bound by several regulations and statutory compliances to ensure that one’s investments are always secure and less prone to forgeries and frauds.
Seamless transfers and easy tracking of transactions
Demat accounts have been a blessing for investors by enabling them to seamlessly transfer shares – digitally. Before Demat accounts came into being, transferring shares used to be a tedious and cumbersome process that involved physically couriering share certificates to the company or registrar to have them transferred in the user’s or buyer’s name. It was a costly proposition, along with being extremely slow, with the process often taking months to complete and some investors also incurring losses due to their shares getting lost in transit. By digitizing the entire process, Demat accounts have completely overcome such issues and made the entire process of transfers super convenient and quick, with the current time for settling a transaction at stock exchanges being only T+2 days (Trade day plus 2 business days). This also enables investors to make quick decisions and enjoy better gains as they can trade faster in the wake of changing market conditions.
Moreover, a Demat account also acts like a bank account by keeping a record of all transactions regarding the securities purchased and sold by the user, thereby helping them keep track of all their various trades.
Thus it is clear that apart from being a mandatory legal requirement, Demat accounts are an indispensable tool for traders today, in a time where everything is going or has already gone digital. They are an all-inclusive solution that secures, simplifies, and speeds up the trading experience of the new-age trader, and allows them to plan their finances better while also opening up an avenue of opportunities for them to make the best of their time trading in the stock markets and gain like never before.
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