In 1996 demat account was introduced in the Indian stock market to store all the physical shares in a digitalized form. The revolutionary turn influenced the investors as well as the regulatory bodies. And this further leads to confusion about how demat account works.
Since the digital space was very new for a lot of people, in fact, it still is, it becomes very crucial to understand the basic working to understand the importance and the necessity of a demat account.
So, let’s begin!
How Demat Account Works in India?
Can you trade with demat account?
Now you must have heard that to start stock market investment in India, it is essential for you to open a Demat account. But why it is essential?
Does this account help you in trading? Broadly speaking you cannot trade with a demat account. In fact, you can only hold the shares in the account.
To trade or invest in the share market, one must have a trading account. So, how demat account works along with the trading account.
Other than this, the stockbroker asks you about the bank account details. So, before moving ahead let’s know the role and importance of all these three accounts in trading.
- Demat account– This is used to hold your shares and other securities. So whenever you buy the shares, they are credited to your demat account. Similarly, when you sell your shares, they are debited from your demat account.
- Trading account– A trading account is used for all the transactions related to your shares. You can trade in shares of different companies using your trading account.
- Bank account– When you open your Demat account, it is important for you to link your bank account with the trading account. It is essential because all the money that will be used in the buying and selling of your shares will be transferred from your bank account to your trading account.
In all, to trade and invest in the share market you need a bank account to transfer funds to and from your trading account. A trading account is used to provide you the platform to trade and to buy or sell shares using the funds and last but not least, a demat account secures your shares in digital form.
Other than these three accounts, the other two entities that are linked with the working of a demat account are the two depositories and your depository participant.
- Depositories- The two regulatory bodies responsible for maintaining the demat account, NSDL and CDSL are the two depositories in India. They are responsible for keeping a check on the proper functioning of your demat accounts.
- Depository Participant– Under the depositories are your depository participants which are commonly referred to as stockbrokers. These serve as an intermediate between the investors and the depository participants.
So, now we know that the entire buying and selling involves your demat account, trading account, and your bank account, let us understand this in detail.
When You are Buying Shares.
- When you are buying a stock, the money from your bank account gets transferred to your trading account.
- From the trading account, your broker transfers it to the seller’s trading account.
- After this transaction is completed, the shares get credited to the demat account of the buyer.
The shares are credited to your demat account in T+1 days. You can easily view this in the holdings tab of your demat account.
When You are Selling Shares
- When you sell the shares of a company, the transfer of the shares from your demat account to the buyer’s demat account.
- Further, you receive the money from the seller’s trading account to yours.
- You can further transfer this to your bank account.
The functioning of the demat account is simple. But if you often wonder that is demat account safe then there are other benefits of demat account as well, including easy transfer of shares, convenient monitoring, and regulation.
SEBI has made it mandatory for every individual to have a demat account to trade in the Indian stock market. It has eased out a lot of things in the industry as well. A demat account functions along with your trading and your bank account to provide you the most convenient and smooth services.
So, now that you know how a demat account works, why not open a demat account today!