Well, for starters, a Demat account basically helps you in storing the shares/stocks/investment products you have bought from the stock market in an electronic format. You don’t need to keep the shares in physical format and in fact, the whole process of buying and selling shares happens automatically.
But, that is what we call “Dematerialization“, right? How else does a Demat account help you in trading?
Well, before we jump into that, let’s talk about this incidence here.
How to Use Demat Account Example
Mr Rajan Velur, an English professor from Chennai always made smart investment decisions by buying specific quantities of stocks every third or fourth month from his savings. By the end of his career, he was able to buy stocks worth ₹20 Lakhs. However, he never used a Demat account and kept all his shares in physical format.
At times, he kept some of his stocks files with his local sub-broker himself once the purchase was made.
One fine day, Mr Velur went to his broker and asked for his shares valued at around ₹3 Lakh. The sub-broker categorically said, “Well, you lost some part of your investments?”
To which, Mr Velur responded, “I never invested in the shares you are mentioning. How come there was any loss?”
The broker simply showed him the POA that Velur had signed in the broker’s name who was basically trading on the professor’s behalf. Without even asking him!
Legally, there was no way Mr Velur could do anything about it. It was too late for that now.
This is something that can happen to anyone. And that is why one must always know how to use Demat Account while keeping a close eye on the approvals you provide.
How to Use Demat Account For Trading
When you open a Demat account, whatever financial products you buy are stored in that particular online account. You can access this account with the help of a username and password that is provided by your stockbroker with which you have opened the account.
For example, if you applied for a few lots of an IPO and fortunately, you were allocated 1 lot of an IPO, then those shares in that particular lot will get stored automatically in the linked demat account.
Apart from these, there are multiple ways for you to use a demat account for your investments and holdings. Here are some of those listed:
1. Addition of a Nominee
When you are about to open a Demat Account, you can choose to nominate anyone as a nominee to the account.
Thus, in case of the death of the account holder, all the holdings in the demat account are transferred to the nominee without the need of any formalities.
2. Online Account Information Updates
In case you want to update your address, contact information or any personal detail, you just need to inform your depository participant or stockbroker who is operating your demat account.
It is the responsibility of the broker to internally inform each of the companies you have invested in.
3. POA Transfer
If you want to transfer the control of your demat account to someone else, then you just need to provide the POA or Power of Attorney to that person and the complete operations will be undertaken by that person at an official level. Without this provision of POA movement, it is pretty difficult and cumbersome sort of a process.
In case you are looking for regular statements that provide information on your current holdings, then you can subscribe for both online and/or offline level statements.
These information pieces will provide you with details of the status, the monetary value of your holdings at that point in time. This makes the whole tracking and monitoring of your stock holdings much easier since all the information can be accessed online.
4. Financial Products Storage
Depending on your trading preferences, you can trade and invest in different segments such as Equity, Mutual funds, ETFs (exchange-traded funds), government securities, IPOs etc. All these investment products get stored in a dematerialized format i.e. in a Demat account.
When you use Demat Account, receiving interest payments, dividends of your shares, refunds of IPO investments etc becomes a straightforward process without your involvement.
This is easy because your demat account has an indirect integration to your bank account (internally through your trading account).
Here is the quick understanding of how it actually works in the background:
When you place a trade in the stock market to buy X shares of ABC company, the shares bought get stored in your demat account. Later, if you choose to sell off 50 shares from your demat account.
Now, these 50 shares will move from your demat account to the buyer’s demat account while the rest 50 shares will stay in your demat account.
In a sense, it works like your bank account where money gets transferred from one account to another. In this case, shares are getting transferred. More in this in the next point.
5. Transfer of Shares
If you are looking to transfer shares from one account to another, the overall process requires you to follow a few steps. While most of this process can be handled online, few brokers may ask for specific manual procedures.
However, without a Demat account, you will just end up making rounds of your broker’s branch carrying the physical files of your shares.
Finally, you can re-materialize your shares at any given point in time into physical files in the case, you are looking to close your demat account. However, that would also imply that you would not be able to access your bought shares online.
Furthermore, if you are interested to open an account?
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