Demat Account and Its Importance Explained in Detail

Stock market trading is one of the highly anticipated and sought-after investment options for aspiring investors across the country. It is also one of the traditional methods of investing in the money as many other options rose to fame after this one. However, traders used to face a lot of inconvenience and hiccups while trading offline and maintaining the share certificates manually. It was not only a time-consuming and hectic task, but also involved the risk of loss and theft. Considering all these problems, NSDL (National Securities Depository Limited) proposed the idea of what is Demat Account in India. 

The purpose behind introducing this account was to enable the traders to store their share certificates electronically for online access. Although these accounts have been in existence for over two decades now (established in 1996), most of the people new to the investment industry are unaware of what is Demat Account. Therefore, it becomes crucial for every investor to know the Demat Account importance before starting their voyage in the Indian stock market. Get the detailed description of Demat Accounts here and learn everything you need to know! 

Why Do Traders Need a Demat Account? 

The first question that budding investors come up with is – “what is Demat Account and why do we need it”? Some people claim that it is mandatory to have a Demat Account, while some say it depends on the personal preference of every investor. Well, technically, there is no law for having a Demat Account for investing in the share market. But at the same time, the SEBI (Stock and Exchange Board of India) has made it mandatory for investors to have a trading account for participating in the stock exchanges. 

So, without a Demat Account, it will become hectic and chaotic for the active traders to manage their share certificates. Since there is no point in availing online services without the account that can store the shareholdings electronically, traders should find out what is Demat Account and open it immediately after the former one. 

Types of Demat Accounts Available 

Depending upon the citizenship of the individuals, the major depositories provide three types of Demat Accounts. One should identify their classification before applying for one as the documentation of each one is different. 

Sl. No.Types of Demat Accounts Recipients 
1.General/Regular Demat AccountsThis one is for investors who have Indian citizenship and live in the country. 
2.Non-Repatriable Demat Accounts This one is for NRI (Non-Resident Indian) investors who do not want to transfer their money in other currencies. 
3.Repatriable Demat AccountsThis one is best for NRI investors who want to convert their income from the investments into foreign currencies. 

For investors who know what is Demat Account and also its types, it is vital to know about the limitation on remittance and money conversion from the repatriable accounts. For the repatriable accounts, investors need NRE (Non-Resident External) accounts. Also, there is a limit on the remittance from NRO (Non-Resident Ordinary) accounts. Investors are liable for gathering information regarding the one that concerns their requirements and investment needs. 

Importance of Demat Accounts in Stock Trading 

The importance of knowing what is Demat Account is as vital as its functioning in stock trading. The account serves as the final destination for storing all the certificates of shares, ETFs (Exchange Traded funds), IPOs (Initial Public Offerings), money market bonds, government securities, etc. 

Facilitates Several Conversion Actions 

Using the Demat Account, a trader can perform many actions for saving almost all his shareholdings electronically. Since this account serves various functions, it becomes easier for traders to manage their different types of shareholdings using one portal. 

  • Dematerialisation – The process of converting shares that traders buy from the stock exchanges into their electronic form is what we term dematerialisation. From this term comes the name of the account that we know as the “Demat Account”. 
  • Rematerialisation – The procedure of reconverting the electronic shareholdings into their physical forms (if needed) is what we know as rematerialisation. 
  • Destatementization/Restatementization – Destatementization is the process of converting mutual funds units into electronic form, whereas Restatementization is just its opposite action. 
  • Redemption – In the case of transferring the mutual funds to the fund house, the process of redemption is used by traders. Using this one, we can easily transfer the units electronically. 

The digital device can serve as the final spot for learning what is Demat Account and its uses. 

Stores Shareholding Certificates Electronically 

Managing and transferring shareholding certificates, buying, and selling them is not a stressful task anymore. With the help of Demat Accounts, all these actions require a few minutes. Traders can manage their investments online through their computers and smartphones. 

Helps in Easy Transfer of Certificates 

Earlier, transferring share certificates took days and a lot of effort to manually posting them to the desired destination. Now, traders just need to acquire the Demat Account number of the concerned authorities to transfer them easily without any hassle. This action can be done a lot faster if the trader is wise enough to choose the best Depository Participant that provides consumer-friendly mobile applications and websites. 

Serves As a Loan Collateral 

Traders and investors who have enough balance in their Demat Accounts can use its statement as loan collateral by pledging their assets to the bank authorities. This process is one of the easiest and safest ways of availing personal loans at reasonable interest rates. 

Temporary Freeze To Secure The Documents 

For investors who are not active participants of the stock exchanges, securing their existing share certificates felt a troublesome task as the risk of theft or loss was there. Thanks to the internet and the advancement of Demat Accounts, one can now easily freeze the accounts during the inactive period. This action makes it safer to store the documents electronically! 

Investors who understand what is Demat Account and its functionings early on are the ones who hold the potential to sustain longer in the industry. With offline trading procedures and resources becoming extinct with each passing day, understanding the nitty-gritty of Demat Accounts is crucial. After all, one cannot afford to miss out on the best trading deals available.