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The online trading system with the dematerialized form of securities works through SEBI-registered (Securities and Exchange Board of India) central depositories. Dematerialized securities/shares are certificates in electronic/digital form that need to be stored in a ,,Demat,, account. The two central depositories in the Indian stock market are the NSDL (National Securities Depository Ltd) and the CDSL (Central Depository Services Ltd).
Issues with Traditional Trading System
The market regulators and investors had to face many issues when Indian financial markets were about paper-form shares. It was a difficult task to handle them, and many times it came into notice that investors got fake/stolen shares. In addition, there were issues related to signature mismatch, and thus, investors tend to lose money. It was difficult for stock exchanges to track such problems and correct them.
Reformed Indian Stock Market
In the mid-eighties and early nineties, liberalization took place in India, and the government of India took initiatives to reform the country’s financial sector. First, the whole banking sector was reformed, including the capital markets. Mutual funds were in the reach of Indian investors. Several regulations were set. And then, the government decided to automate the stock market fully.
The Indian stock market was about to witness an unprecedented boom in terms of several stock exchanges, listed companies, trade volumes, stockbrokers, investors, etc. However, such a surge brought numerous problems. Most of which was due to the large volume trades, clearing, and settlement. It was solved with the dematerialized trading system where book entry is done electronically using Demat accounts.
What is a Demat account?
Dematerialization is the process of transforming paper-based certificates of securities into digital form. Demat account stores these dematerialised securities that are purchased from the stock market safely. Demat accounts are used to store any type of financial instrument in the stock market. It can be shares, bonds, commodities, exchange-traded funds, currencies, and even government securities.
How to open a Demat Account?
Following are the simple steps you can follow to open a Demat account.
Step 1: Selecting a depository participant/stockbroker is the first step. A depository participant is nothing but an agent of a central depository that performs the mediator’s duties. You can find the list of depositories on CDSL and NSDL.
Step 2: Get an online account opening form at the broker’s official website. Post filling the form, you are supposed to submit the form and required documents, i.e., your address proof, income proof, and identity proof.
Step 3: Once your documents get verified, an agreement is made by your stockbroker. It consists of charges and services-related information. You need to sign this agreement.
Step 4: After you sign the agreement, you are almost ready to go! You will receive your unique Demat account number along with the log-in credentials of the trading portal. With the help of those credentials, you can start trading in the stock market.
Advantages of Demat System
The ownership is transferred immediately.
It allows the smooth and quick transfer of security ownership from one party to the other. There are no transit issues involved in the new system. Buyers get the ownership without any hassle.
The fear of signature mismatch is eroded from the trading system as no signature is required while buying or selling securities.
It eradicates the paper system. Thus, investors can save a lot of time.
The brokers have noticed that more and more people have started accepting new ways of investing. And, the volumes of traded stocks have increased in this convenient way of investing.
India has the largest number of publicly listed companies. And with time, the number of retail participants is also increasing like in developed countries. With the dematerialized securities trading system, India has already witnessed a revolutionary change in the stock market. More and more investments will bring new companies to the market, and thus, the ecosystem will evolve. Investors! Get ready for a well-diversified investment portfolio.