The main purpose of a Demat account is to help investors hold shares and securities electronically. Additionally, a Demat account also allows investors easy access to their holdings leading to hassle-free transactions.
Think of the Demat account as a virtual bank account for holding all the stocks and securities in one place. As a result, investors can do away with the physical handling and storage of share certificates or any other paperwork.
In this blog, we will delve further into the importance of a Demat account for investors and how the account itself works to trade securities.
Importance of a Demat Account for Investors
Having covered the basics of a Demat account, here is a look at why investors need a Demat trading account to help them navigate the stock market.
1. Faster Access
Since a Demat account holds all the stocks electronically for an investor, it becomes extremely convenient for them to access, manage, and track all their security investments and statements via Internet banking.
2. Smooth Dematerialization Process
When an investor decides to make a shift from physical share certificates to a Demat account, they will require the assistance of a depository participant or DP. With the DP’s help, an investor’s physical share certificates can easily be converted into electronic holdings to be saved under the Demat account. This process is known as dematerialization.
3. Hassle-Free Share Transfers
When a trade is carried out in the stock market, the seller needs to be able to transfer the shares bought to the buyer. This process, in the physical certificate form, takes longer and is susceptible to errors. However, the Demat account allows the transfer of shares in an easier and time-saving manner.
4. Better Liquidity
Since Demat accounts have simplified the process of selling securities, they can easily be converted to cash when needed, providing better liquidity to the investors.
How does a Demat Account work?
The main of the Demat account is to hold all the securities an investor has bought electronically, under one account.
Here are a few pointers that can help you understand the workings of a Demat account better.
- The very first thing an investor should do is to find a stockbroker who aligns with their trading needs and open a Demat trading account with them.
- The Demat account of an investor is linked to their trading account online. This trading account is further linked to their bank account.
- To begin the trading process, investors need to transfer funds from your bank to the trading account.
- After the completion of the formalities related to the opening of the Demat trading account, investors need to log in to their Demat trading account with the information provided to them by the stockbroker.
- Investors also need to remember that a Demat trading account is linked to their bank account.
- With the help of the trading account, an investor can place ‘buy’, or ‘sell’ requests is placed in a trading account.
- If the order is to ‘buy’, it is the job of the stock exchange to look for a seller who wants to sell shares. If the price of both the buyer and the seller matches, then the ‘buy’ order is sent to clearance houses.
- The clearance houses then debit those many shares from the seller’s Demat Account and add or credit them to the buyer’s Demat Account
- Investors need to remember that the buyer and seller don’t need to be under the same DPs.
Conclusion
The Demat account is a crucial, should we say, rite of passage for an investor. Without the Demat account, an investor cannot start their trading journey. However, it is important to understand how the Demat account works to make full use of the benefits it provides to an investor.
uzma