Formerly, shares were issued in the form of a Shares Certificate. When a person sold a business's shares, the certification would be signed and sent to the buyer by means of a broker. The full process would take a minimum of 15 days to complete and occasionally over a month. Hence the floating stocks could not be traded, or on occasion the agent would trade the stocks without the customer's knowledge.
To prevent these flaws 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 electronic copies of your shares. To be more specific, a demat account retains your stocks and securities in a digital format. This helps in secure, quick, and suitable trading for stocks.
It's similar to a bank account. The only real difference being a bank account holds cash, and a demat account holds shares. Users who start demat account find it rather convenient to hold, trade, invest and monitor stocks, stocks, mutual funds, bonds, etc. This is because you're able to perform all these tasks from the comfort of your property.
How Can a Demat Account Work?
The working of a demat account is dependent on two other accounts- your own bank account and trading account. Otherwise, the aim of your demat account is only limited to holding stocks, mutual funds, bonds, etc. A trading account is a portal where the true cash flow takes place. When you purchase or sell stocks, the account gets debited and credited, respectively. Your bank account is associated with the demat and trading account for the transfer of capital.
To buy or sell shares, to begin with, you have to login into your trading account. Later, put a 'buy' or 'market' request in the trading account for a particular stock. Based on your request type, the query is routed by your Depository Participant into the stock market together with other details. Then the additional process of shares credit or debit occurs.
For instance, suppose you've put a purchase request. In that case, the stock exchange will discover a vendor who's selling a similar amount of stocks and notify the clearance homes to debit the specific number of shares from the vendor's demat account and charge it to your demat account.
Kinds of Demat Account
Now that we have a reasonable idea about demat accounts let us have a peek at its types. There are primarily 3 different types of demat accounts.
1. Regular demat account: This account is for Indian citizens who live in the nation.
2. Repatriable demat account: This kind of demat account is for NRIs. It empowers the money to be transferred overseas. But this type of account has to be connected to a NRE bank account.
3. Non-repatriable demat account: This account is also for NRIs. But with this account, fund transfer overseas is not feasible. It has to be linked to a NRO bank account.
Why Do You Want a Demat Account?
Using a demat account lets you perform purchase and sell transactions from the comfort of your couch using just one click. You can even hold different investments like bonds, exchange-traded funds, mutual funds, government securities, etc.
Benefits of Demat Account
- Quick and safe transfer of funds without the fear of loss of theft.
- Smoother settlements with less paperwork.
- Reduction in human errors that occurred due to physical transfer of shares certificates.
- Streamlined accounting and management.
Conclusion
In today's fast-paced universe, no investor might prefer wasting time on enormous paperwork and guidelines. Hence a demat account is an ideal option. Can it be a beginner or someone who has been in the financial market for an extended time period.
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