India has moved from paper trading to electronic trading in the equity markets. If you want to trade in shares, you will require a trading account. This account allows you to buy and sell shares that are traded on the equity markets.
A trading account may be opened with a registered firm or a stockbroking entity. The account assigns a unique ID that provides you with access to execute transactions on the stock markets.
In simple terms, dematerialization of shares means holding your investments in an electronic form. A demat account converts physical certificates into a digitalized form, which makes it convenient and safer to hold your investments.
When you open this account, you receive a number that allows you to electronically settle your trades. It works similar to a regular savings bank account that allows you to deposit and withdraw money. In the dematerialization account, you hold various securities, which are credited and debited based on your buy and sell transactions, respectively.
Why a demat account is necessary to trade?
When you open a demat account, you hold all your investments electronically. Here are some reasons why this type of account is important.
- A safer way to hold securities
Earlier, shares were held in physical certificates and posed risks such as damages, loss, or theft. However, with dematerialization, the shares are held in a digital form making it safer to hold various securities. Moreover, you need to comply with additional security regulations and statutory requirements when you opt for this account.
- Necessary for trading
Without a demat account online, you are not allowed to trade on the stock markets. This is because stock trading now happens electronically, which makes it necessary for you to hold a dematerialization account to execute any transactions on the equity markets.
- Cost efficient
Physical certificates incurred several costs such as stamp duty and handling fees. All these additional expenses are eliminated with dematerialization. Therefore, trading costs have reduced resulting in significant savings when you trade in shares.
- Odd lot trading
Historically, you were unable to deal in odd lots when shares were issued in the physical form. Only specified quantities on each certificate could be traded. However, dematerialization allows you to trade in odd lots, wherein you may buy or sell even a single share.
- Transfer funds from your bank account to your trading account
- The stock market transaction is executed from your trading account; for buy order shares are purchased and for sell orders shares are sold from this account
- For executed buy orders, the shares are credited to the dematerialization account and sold shares are debited from this account
Although trading and demat accounts are used for different purposes, these are equally important to trade on the stock markets.