When the Bombay Stock Exchange, the oldest in Asia, was founded in 1875, it was an open outcry floor trading exchange. This means traders would buy or sell stocks by verbally shouting prices on an open floor. Today, it is vastly different. It is an electronic system where you buy or sell stocks online.
Similarly, earlier, shares were physical receipts. On buying shares, you got a certificate. Over the years, people thought stock market trading was not for them because of the sheer paperwork involved in completing a transaction. Stock market settlements, wherein you receive shares if you buy or money if you sell them, were longer. In 1996, trading began on NSE for shares held in demat_account form. It was the beginning of a new paperless trading stock market trading environment. If you buy a share today, it gets credited to your account in two days. Today, shares get transferred to your demat_account account.
Demat Account or dematerialized account provides the facility of holding shares and securities in electronic format. During online trading, shares are bought and held in a demat account, thus facilitating easy trade for the users. A Demat Account holds all the investments an individual makes in shares, government securities, exchange traded funds, bonds and mutual funds in one place.
Your demat account is held in depository services providers. There are two depository service providers in India, the National Securities Depository Limited (NSDL) and Central Depository Services Ltd (CDSL). You can open a demat account with either of these depositories through an intermediary called a depository participant/stock broker. When you participate in a stock market and buy shares of a company, the share certificates in the electronic form are finally added to your depository account called the demat account.
There are many benefits to this demat system. Some of them are
- Easy and convenient way to hold securities
- Immediate transfer of securities
- No stamp duty on transfer of securities
- Safer than paper-shares (earlier risks associated with physical certificates such as bad delivery, fake securities, delays, thefts etc. are mostly eliminated)
- Reduced paperwork for transfer of securities
- Reduced transaction cost
- No “odd lot” problem: even one share can be sold
- Change in address recorded with a Depository participant (DP) gets registered with all companies in which investor holds securities eliminating the need to correspond with each of them separately.
- Transmission of securities is done by DP, eliminating the need for notifying companies.
- Automatic credit into demat account for shares arising out of bonus/split, consolidation/merger, etc.
- A single demat account can hold investments in both equity and debt instruments.
Traders can work from anywhere (e.g. even from home).
A demat account is necessary these days to participate in the stock market and buy/sell stocks.