A Beginners Guide to Demat Account: Meaning, Working, and Types of Demat

Earlier, shares were issued physically in the form of a Shares Certificate. When a person sold a company's shares, the certificate would be signed and sent to the buyer via a broker. The entire process would take a minimum of 15 days to complete and sometimes over a month. Therefore the floating shares could not be traded, or sometimes the broker would trade the shares without the client's knowledge. 

To prevent these delays and frauds, the Securities and Exchange Board of India (SEBI) decided to dematerialize the shares of all companies. This gave rise to demat account. A demat account is a storehouse of digital copies of your shares. To be more specific, a demat account holds your stocks and securities in an electronic format. This helps in safe, fast, and convenient trading for shares. 

It is similar to a bank account. The only difference being a bank account holds cash, and a demat account holds shares. Users who open demat account find it very convenient to hold, trade, invest and monitor shares, stocks, mutual funds, bonds, etc. This is because you can perform all these activities from the comfort of your home.

How Does a Demat Account Work?

The working of a demat account is dependent on two other accounts- your bank account and trading account. Otherwise, the purpose of your demat account will be only limited to holding shares, mutual funds, bonds, etc. A trading account is a portal where the actual cash flow takes place. When you buy or sell stocks, the account gets debited and credited, respectively. Your bank account is linked to the demat and trading account for the transfer of funds.

To buy or sell shares, first, you need to login into your trading account. Later, put a 'buy' or 'sell' request in the trading account for a particular stock. Depending on your request type, the query is sent by your Depository Participant to the stock exchange along with other details. Then the further process of shares debit or credit takes place.

For example, suppose you have put a buy request. In that case, the stock exchange will find a seller who is selling a similar quantity of shares and inform the clearance houses to debit the specific number of shares from the seller's demat account and credit it to your demat account. 

Types of Demat Account

Now that we have a fair idea about demat accounts let's have a look at its types. There are mainly three types of demat accounts.

1. Regular demat account: This account is for Indian citizens who reside in the country.

2. Repatriable demat account: This type of demat account is for NRIs. It enables the money to be transferred abroad. However, this type of account needs to be linked to an NRE bank account.

3. Non-repatriable demat account: This account is also for NRIs. However, with this account, fund transfer abroad is not possible. It needs to be linked to an NRO bank account. 

Why Do You Need a Demat Account?

Having a demat account lets you perform buy and sell transactions from the comfort of your couch with a single click. You can also hold various investments like bonds, exchange-traded funds, mutual funds, government securities, etc. 

Benefits of demat account

1. Quick and safe transfer of funds without the fear of loss of theft.

2. Smoother settlements with less paperwork.

3. Reduction in human errors that occurred due to physical transfer of shares certificates.

4. Streamlined accounting and management.

Conclusion

In today's fast-paced world, no investor would prefer wasting time on massive paperwork and guidelines. Hence a demat account is an ideal choice. Be it a beginner or a person who has been in the financial market for an extended period of time.