A Demat account is a fundamental tool for traders who want to trade stocks on the stock market. It works as a digital repository that securely stores the holdings and makes trading seamless. A Demat account offers investors speed, security, and convenience in how they manage their investments and assets.
Physical share certificates are not necessary with a Demat account. This is why there are less chances of their theft, loss, or destruction. These are just a few functions of a Demat account. Investors must know how Demat accounts work in order to comprehend their purpose better.
How Does a Demat Account Function
The key purpose of a Demat account is to store the shares and securities digitally. This account, however, necessitates having 2 other accounts to function, which are:
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Trading Account: Your trading account serves simply as a place to keep money for trading, making it distinct from a demat account. It is also responsible for trading and making transactions in the stock market.
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Bank Account: The Demat & Trading accounts are connected to your bank account. To purchase or sell, you must transfer funds from the linked bank account to your trading account.
Parties Involved in Demat Account Transactions
A Demat Account transaction involves the following parties:
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Depositaries: Depositories are the parties who deal with digital currency accounts. India has two depositaries: National Securities Depository Limited (NSDL), which operates under the NSE, and Central Depositary Services Limited (CDSL), which operates under the BSE.
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Depository Participants: Depository participants include banks, financial institutions, and authorized stock broking firms.
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Clearance Houses: Clearance houses handle the debiting and crediting of shares from the accounts of buyers and sellers. The nation’s two principal clearance houses are NSCCL under the NSE and ICCL under the BSE.
Working on a Demat Account
Investors and traders must remember that you receive a connected trading account with a separate login ID and password in addition to a Demat Account. This is how shares are bought and sold. The purchased shares are thereafter held in a Demat Account.
Therefore, you must log into your trading account that is connected to your bank account in order to purchase or sell a certain share. Your Depository Participant (DP) instantly transmits a “buy” or “sell” request, together with further data, to the stock exchange when it is placed in the trading account for a specific stock.
The stock exchange then locates a seller who wants to sell the same quantity in the event that the order is for “buy.”
An order from the stock exchange is transmitted to a clearing house to settle the deal after your order matches. At the conclusion of the trading day, the quantity of shares you purchased is credited to your Demat account after the transaction has been concluded. The quantity of shares that were sold is deducted simultaneously from the seller’s Demat account.
Demat Account Charges
Charges apply to investors for running and maintaining their Demat accounts.
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Annual Maintenance Charges (AMC): This is an annual fee charged by the Depository Participant (DP) for maintaining the Demat account.
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Transaction Charges: A fee is levied for each buy or sell transaction executed through the Demat account.
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Dematerialization and Rematerialization Charges: Fees are applicable when converting physical shares into electronic form (dematerialization) or converting electronic shares into physical form (rematerialization).
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Statutory Charges: Additional charges may be levied by regulatory bodies, like the SEBI, for various services.
Conclusion
A Demat account makes purchasing, selling, and transferring securities easier than the actual share certificates. Although regulatory supervision and security measures give investors peace of mind, the electronic form of the account guarantees protection against loss, theft, or damage. A Demat account is still an essential tool for everyone trying to successfully and safely negotiate the intricacies of the stock market as the financial market grows.
