A Demat Account is an account that allows investors to hold their shares in an electronic form. Stocks in Demat account remain in dematerialized form. Dematerialization is the process of converting physical shares into electronic format. A demat account number is required to enable electronic settlements of all the trades. Demat account functions like a bank account, where you hold your money and respective entries are done in bank passbook. In a similar form, securities too are held in electronic form and are debited or credited accordingly. A demat account can be opened with no balance of shares. You can have a zero balance in your account.
As it is difficult to hold shares in physical forms because it involves a lot of paperwork, long process and risk of fake shares. So, for simple and seamless trading and investing, Demat account is must to trade in India’s stock exchanges. Although the Securities and Exchange Board of India (SEBI), has allowed trades of up to 500 shares to be settled in physical form but this option is not preferable any more. A demat account holds the certificates of financial instruments like shares, bonds, government securities, mutual funds etc. So, it involves the process of converting physical shares into electronic form and credited to investor’s demat account.
An investor who wants to hold securities in dematerialised (demat) form and receive or deliver securities by inter-account transfers must have a depository account called beneficiary account with a DP of his choice.
There are two Depositories in India - the National Securities Depositories Limited (NSDL) and the Central Depository Services Limited (CDSL), through whom the shares are held by the various depository participants. When you buy or sell shares, respective DP credits or debit your account accordingly.
* No Documentation Charge