Popular as a demat account, a dematerialization account is an online system to store and transfer financial securities electronically. It allows dealing with many financial securities like stocks, derivatives, commodities, etc., which increases its importance more. All investments you hold in your Demat account refer to as your portfolio holding.

With the inception of the demat and trading account, the stock market has achieved revolutionized scale and speed. You can trade more securely, faster, and conveniently. Before 1996 when there was no demat, an investor had to store and buy/sell securities in paper form. It was a cumbersome task and sometimes insecure also. At present, as per the Securities and Exchange Board of India mandates, you must open a Demat account and trading account with an authorized depository participant (DP) to trade in the stock market. 

Parties Involved in Demat Account Transaction

• Central Depositories 

In India, there are two depositories to handle Demat Accounts: 

• Central Depositary Services Limited (CDSL) 

• National Securities Depository Limited (NSDL) 

• Registered Depository Participants/ Stockbrokers 

Central depositories do not serve investors directly. Instead, they provide services through registered Depository Participants (DPs). These DPs are registered stockbrokers to offer trading services to you. It can be a stockbroking firm, individual, bank, a non-banking financial institution with which you can open your demat and trading account online. 

• Stock exchange 

Exchange is the online platform to meet traders and place trades like Bombay Stock Exchange (BSE), National Stock Exchanges (NSE). All trading transactions on stock exchanges take place online and are executed by clearance houses.

• Clearance Houses 

There are two primary clearance houses in the country: 

• National Securities Clearing Corporation Ltd (NSCCL) 

• Indian Clearing Corporation Ltd (ICCL) 

These clearance houses take care of traded shares from the sellers’ and buyers’ demat accounts. 

How Demat Account Works

A demat account gets debited and credited like a bank savings account. The way your bank account deals with cash, similarly, your demat account deals with financial securities. 

You need a trading account to transact for buying/selling securities in the stock market. Your demat account is linked with your trading account. Whenever you buy financial security using your trading account, your demat account will get credited to your demat account, and when you sell them, it will get debited with the same security. Now ownership certificates of financial securities are available in the electronic format equivalent to paper certificates and known as Demat credit.

Transaction Identification

When you place a buy/sell request for particular security using your trading account, your stockbroker forwards it to the stock exchange immediately. Then the stock exchange finds a buyer/seller who wants to buy/sell the same security in the same quantity and sends this order to clearance houses. The house will debit the particular securities from the seller’s Demat and credit it to the buyer’s Demat. And your trade will be completed in the stock market. All purchases refer to Demat credits, and sale transactions are called demat debits.

Open a Demat Account

A Demat account is imperative to make investments in the stock market. Here is the convenient Demat account opening procedure:

1. Choose a registered stockbroker. It can be a discount stockbroker or full-service stockbroker. Explore its official website and get the demat account online form. 

2. You need to enter basic personal details like your name, contact details. Ensure you enter an active phone number and email address to receive an OTP. You need to verify the OTP to continue the process. 

3. Now enter the detailed information of your PAN, bank savings account, resident address, marital status, employment details, etc., and upload scanned copies of your documents – ID proof, address proof, income proof. 

4. E-sign the form, and submit. 

The payment will depend on the term and conditions of the stockbroker.