What is a Demat Account

You must be aware that if you want to to do trading in the stock market then you must have your Demat account.

Demat account is an electronic account that holds shares in it. There used to be a physical share certificate in old days but because of technology, it has been shifted to a Demat account. But the question is, why it is necessary to have a Demat account?

Let us see.

Earlier when the electronic system was not there, what used to happen is the settlement date was T+30.

Suppose, Rehan ordered to buy shares of XYZ company. Earlier it happened that before the buyer (say Rehan) gets the shares, he died. But the shares are still in the post because to the T+30 concept and Rehan’s broker has already taken money from Rehan and on top of that, the broker says to the company that I bought it from Rehan and in this way the broker transfer the shares from Rehan to himself. So, the broker made a double profit and to avoid this Demat concept came (1996 dematerialization act).

If a company is listed on the stock exchange then it is required for the company to have its shares in Demat form. But for Private Limited firm you don’t need Demat, you will have a physical share certificate.

Because of the electronic system, the settlement date has reduced drastically from T+30 to T+2. This system helps in superfast clearing and no chance of defaults even if the buyer dies.

Demat is required when you want to trade the securities and because of this, you have to approach Depositories.