Importance of Demat Account in Trading

Previously stock trading was done with the help of physical certificates. In the present times, ademat account has taken its place. Demat is the abbreviation of ‘dematerialization’. A demat account is the electronic form of the physical certificate used in stock markets. It is similar to a bank savings account and is used to keep all the financial assets and instruments like stocks, debentures, bonds and NSC in a dematerialized mode.

In 1996, Depository Act was introduced in India to smoothen the process of buying and selling of shares. A depository is an agency that is responsible for holding dematerialized securities and looking after its transfer. In our country, there are two main depositories: Central Depositaries Services Limited (CDSL) and National Securities Depositories Limited (NSDL). These agencies are responsible for various depository activities like opening and closure of any demat account and many other online trading transactions.

How to Open a Demat Account?

NSDL and CDSL have a list of depository participants (DP) on their websites. DP provides a safe place to hold the shares bought by its clients. Most banks, brokers and other financial institutions are depository participants. One can open a demat account by registering with any DP. The procedure to open a demat accountis to fill up an account form, sign an agreement with the DP and submit the essential documents.

The official documents needed for the procedure are proof of identity, proof of residence, two pass port size photographs and a copy of PAN card.

Once the account is functional, the applicant is given a unique Beneficial Owner Identification (BO ID) to make transactions.

What Does a Demat Account Do?

Overall, a demat account helps in reducing brokerage charges. It makes pledging for shares an easy job and avoids confusion in the ownership title of securities. It provides an easy receipt of public issue allotment.

Advantages of Demat Account:

Unlike its predecessor, the physical certificates, a demat account avoids delays in transaction, and has the following benefits:

- A demat account reduces the risk of forgery and counterfeiting.
- It is an easy and faster way to transfer securities.
- With elimination of paper work there is no need for stamp duty for transactions.
- While comparing it to physical certificates, the transaction cost is very low.
- Change of address, signature, dividend mandate, registration of power of attorney, and transmission becomes easy as it is taken care by a single instruction to the DP.
- Investors will have an access to their complete transaction details through Internet and mails.

In the Indian Stock Market scenario, there is an upward trend with tremendous growth opportunities for short term and long term investments. So first time investors can go ahead and open their demat account to grasp benefits.

This is a guest article by Kotak Securities, one of India’s leading share broking firms.

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