Do traders really maintain money in their DEMAT accounts?

23 Jan 2020

The first and foremost step for trading in stock market is the opening of a DEMAT account. Securities and Exchange Board of India (SEBI) has made it mandatory for every trader and investor to have a DEMAT account where securities can be kept in dematerialized form.

DEMAT accounts can be opened through almost all nationalized banks as well as brokers. Different DEMAT accounts are required for all the exchanges, so first decide the exchange in which you would like to trade. NSE and BSE are the two most prominent stock exchanges in India.

Each exchange has an individual depository, where DEMAT account is opened. You cannot directly approach a depository and is thus generally done either through your bank or broker. The purpose of DEMAT account or dematerialized account is to store the securities which are bought from the market by the investor in dematerialized form.

There are two main depositories in the Indian market, the National Security Depository Limited (NSDL) and the Central Depository Service Limited (CDSL) which serve as the depositories for NSE and BSE respectively. SEBI has made it mandatory to have a DEMAT account before trading in the stock market after the Depositories Act of 1996.

The Advantages of Dematerialized system

• It is very convenient and safe

• It helps in immediate transfer of securities.

• Risks like fake securities, bad deliveries which are usually associated with physical certificates is eliminated.

• The hectic paperwork involved in transfer of physical certificates is reduced significantly.

• Automatic settlements into DEMAT in case of bonus issue, splitting etc.

• All the instruments from different markets like equity, derivatives etc. are hold in a single account

• It helps to reduce the cost to the issuing company by reducing the printing and distribution costs.

The dematerialization has thus brought in numerous benefits for all entities including brokers, companies and investors. In case of a trade settlement the transaction of securities that is the pay in and pay out of securities are processed directly from the DEMAT account of the trader. The monetary transactions are all processed from the trading account which is linked to the bank account of the trader or investor.

The DEMAT account is nowhere involved in the monetary transactions in case of any market or market segment. The sole purpose of a DEMAT account is just to store all the securities and instruments in dematerialized form at one place. The DEMAT account can never hold any money, and all the money related transactions are usually processed directly from the trading account.

You can have a total value associated with your DEMAT account in some cases, which is actually the total value of all your securities stored in that account and does not mean that there is any cash balance in your DEMAT. All profits and losses associated with trading are directly settled to your trading account from where they can be transferred to your bank account as per your need.

DEMAT account has transformed the stock market trading experience by making the clearing and settlement process reliable and fast. There is a common myth associated with DEMAT that there needs to be certain amount of cash funds in your DEMAT for trading which is incorrect. DEMAT account can hold and store nothing apart from dematerialized securities. It is necessary to brush up your basic concepts before you start trading and investing in the market. It is better to take services from a certified investment advisor, if you don’t have experience with the stock market basic terminologies.

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