What is a demat account?

To understand the concept of demat let us first understand how your bank account operates. When you deposit cash or deposit a cheque in your bank account, the balance in your bank account increases. When you withdraw cash or when you issue a cheque, the balance in your bank reduces. Effectively, your bank is a repository of your cash balance. Similarly, the demat account is a repository of all your shares and securities owned. Effectively, you hold your shares and other securities in dematerialized electronic form. But why is a demat account so important?

Shifting from physical shares to demat:

Prior to 1997, Indian investors held their shares in the form of physical share certificates. When you bought shares, the broker would give you the contract note with the share certificates along with the transfer deed. Then the share certificates along with the transfer form duly executed will be sent to the company’s registrars. The registrar will review the application and then include your name in the register of shareholders and issue fresh share certificates to you. But this system had a lot of flaws. Share certificates would get lost in transit, certificates would get defaced and mutilated over a period of time, the signatures may not match or there could be bad delivery due to other technical reasons. Storing and maintaining these physical certificates was also a cumbersome task. Demat overcomes all these problems. Over 99% of the shares in India now exist in the demat form.

So, what exactly is a demat account?

The word demat is an abridged version of dematerialization. When these shares were converted into a mere credit entry into your demat account and the share certificates were destroyed, it became known as demat. If you were holding physical share certificates then you had to approach your Depository Participant (DP) with a Demat Requisition Form (DRF). The DP will interface with the registrars and the shares would be dematerialized. Physical shares that were being sent for transfer could be accompanied with a Transfer-cum-demat (TCD) form so that the ownership would be changed and directly credited into your demat account. Nowadays all purchases and sales of shares only happens through the demat account in non-physical form.

What advantages does the Demat Account proffer?

Firstly, demat overcomes your problems of loss in transit, theft of certificates, duplicate certificates etc. Secondly, for change of address intimation, you just need to intimate your DP once. You do not need to write separately to the registrar for each company’s shares held. Thirdly, all corporate actions including splits, bonuses and dividend payments are automatic. Last, but not the least, demat makes stock markets accessible to even small investors. Let us understand a little better! When trading was happening in physical certificates, there were minimum lot sizes in which stocks could be traded. That kept small investors out of the equity markets. With the advent of Demat you can even buy or sell 1 share of Infosys or 1 share of Reliance Industries. That is how simple it is.

Demat is an all-encompassing account:

You can hold a variety of assets in a single demat account. You can hold equity, mutual funds, corporate bonds, gold bonds and even ETFs in your demat account. Today even commodities are held in demat, although you need to have a separate demat account for the same.