A demat account is similar to your bank account. Just like you hold your cash balance in your bank account, you hold your investments in shares, bonds, mutual fund units,government securities, exchange-traded funds, etc. in your demat account. A demat account (also called as a dematerialised account) holds all your shares and securities in the electronic format.
Prior to 1997, shares were held in physical form i.e. in the form of share certificates. Holding the shares in physical form involved various difficulties like bad deliveries, loss of share certificate, signature mismatch, issues with storing share certificates, etc. To do away with these hassles, dematerialisation was introduced. With dematerialisation, all the share purchases and sales are done only in the demat mode thus making share trading easy for the traders and investors.
A demat account lets you trade online from anywhere in the world. The primary purpose of a demat account is to eliminate the requirement of holding physical share certificates and facilitate a seamless tracking and monitoring of holdings, all at one place.
How Does a Demat Account Work?
In India, there are mainly two depositories who handle demat accounts – the National Securities Depositories Limited (NSDL) and the Central Depository Services Limited (CDSL). Your broker will open your demat account with either of the two depositories. These depositories hold all your account details on your behalf.
When you purchase shares and securities, your broker credits your demat account with the purchased shares and securities. The shares are credited to your account by the broker within T+2 days i.e. within trading day + 2 days after that.
Likewise, when you sell shares and securities, your broker debits your demat account with the same after receiving a delivery instruction note from your end. You need to fill in all the details of the stock sold in the delivery instruction note. Subsequently, you will also receive the credit for the shares and securities sold in your bank account.
You can view the details of all the shares purchased and sold in your statement of holdings. If you are trading through an internet-based platform, you can view your account holdings online.
The Bottom Line
With an understanding of how demat account works, you can start financial planning through investing in the stock market. In order to facilitate share trading, you may open a demat account with Kotak Securities.