Dematerialisation is defined as the process by which a physical share certificate gets converted to an electronic format and gets stored in an online demat account. The Depositories Act was passed in 1996, after which dematerialisation was implemented in India. Prior to this, shares were bought and sold between traders, by exchanging share certificates physically. Only after the document was received in an intact form by the buyer, he paid the amount due to the seller for purchases of the shares.
Trading physical shares used to be a long drawn and tedious process. There were also various risks involved. Dematerialisation has improved the trading process to a great extent. It has enhanced the flexibility and speed of transacting in shares. Broking agencies have aided the financial literacy of people in general, by educating traders about what is demat account. With the operations being smoothened by demat share trading, investors can focus more on portfolio management and planning investments, as per their specific needs.
What is the use of demat account:
A demat account is an online store of the shares purchased by an investor. It provides all the details regarding the shares and bonds bought and sold such as – number of shares, the value of exchange, date of exchange, issuing company etc. Electronic trading makes it easier for traders to make investments, as the process is very fast. With the demat account infrastructure, traders from Tier II and Tier III cities have also entered the markets. The trading environment has become more dynamic and inclusive. Demat account services are provided by the two depositories NSDL (National Securities Depository Limited) and CDSL (Central Depository Services Limited) in India. Here are some ways by which the demat account scores over physical shares:
1. Low risk:
Demat share trading has lowered the risks of theft, spoilage, mutilation, and frauds which existed earlier. Physical share certificates if spoiled or damaged in any way were not considered valid and led to losses to investors. Also, there was a risk of theft of the document, which was essential to establish title on the shares invested in
2. Secure transactions:
Online transactions are secure and safe, as there are various cybersecurity systems at work for the trader’s benefit. Also, broking agencies take some of the responsibility for ensuring safety while transacting online. Every investor gets a unique demat ID code, which should be quoted while trading. This gives a unique identification to every trader and prevents confusion.
3. Convenient:
Many individuals trade full time or even as a freelance or part-time work. It is no longer necessary to be engaged in trading full time. Brokers and traders can access the computer terminals from any remote location or even from mobile applications and execute trades in a matter of seconds. Dematerialisation has brought immense convenience on the table for traders.
4. High-speed trading:
The speed of the transactions has improved vastly, and it only takes a few minutes to complete a trading transaction. The concept of ‘algorithmic trading’ has also emerged wherein computer programs execute trades based on certainly advanced algorithms in real time, as they obtain information related to the markets and stocks. Profits can be generated at a pace which is impossible for a human trader to achieve.
5. Financial Inclusiveness:
Because of electronic trading and secure settlements, investors from mid and small tier cities in India have also opened up to trading in shares as an investing opportunity. In earlier times, share trading was considered a more risky alternative to small-time investors. However, with the rising Internet and mobile penetration in smaller towns, the share market has become more inclusive.
6. Company correspondence:
The issuing companies needed to be notified under past regulation, whenever the shares were transferred, and even when there was any material change in investor information such as name change or address change. This unnecessary correspondence has been eradicated with the current demat regime. Changes in information can be now made by the investor himself on the online demat portals.
7. Stamp duty waived:
Stamp duty is levied on documentation. This was an added cost for investing in shares earlier, as physical share certificates existed. Dematerialisation has helped to waive this extra cost for investors.
8. Focus on planning:
As the electronic trading process is seamless and operationally sound, traders can focus on planning their investments, fund allocations, monitoring the portfolio and taking corrective action whenever required. A lot of time and energy is saved because of the elimination of tangible share certificates.
The dematerialised trading environment has revolutionised investing in shares for the average investor. It has helped traders become more tech-savvy and quickened the pace of transactions. Once investors thoroughly understand what is demat account and its features, they get familiarised with operating the account smoothly in no time. Investors have benefitted from the fast and secure trading as compared to the earlier regime.
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