Purchasing and Selling of Shares Through Demat Account

Investing in equity shares has long been considered a high-risk, high-reward strategy to create wealth over the long term. As an increasing number of investors in India seek to grow their wealth and earn inflation-beating returns, the popularity of the equity market continues to rise. If you also want to participate in the equity market and benefit from market price movements and market-linked returns, the first and most fundamental thing you need to do is open a demat account.

In this handy guide, we will take a closer look at the finer details of purchasing and selling equity shares via a demat account. To understand how trading via a demat account works, it is essential to first understand what this account is and how it operates. This will help you gain more clarity about how to buy shares through your demat account, how to sell the shares from your demat account, and how to manage your account smoothly. 

Let us begin by getting to know what a Demat account is and take a closer look at its workings. 

What is a Demat Account and How Does it Work? 

A Demat account — short for a ‘dematerialized’ account — is a digital account that acts as a repository for shares and securities held in electronic format. Think of your demat account like a savings account, but for your shares and securities. If you want to hold securities in the dematerialized format, this account is a must-have. Without a demat account, you cannot buy, sell or even hold electronic securities. 

With a demat account, you can trade in various financial instruments like stocks, bonds, mutual funds, government securities and exchange traded funds (ETFs). Before we discuss how to purchase shares through your demat account, let’s find out how this type of account works and what the key principles involved are. 

• Elimination of Physical Certificates

Before demat accounts were introduced, it was the norm for investors to hold physical certificates as proof of ownership of shares and securities. These paper certificates were not only cumbersome to manage but also carried a significant risk of theft, loss or other kinds of damage. However, the demat account has now replaced the need for physical certificates by allowing investors to store securities in an electronic form.

• Opening a Demat Account

The dematerialization process is closely linked with opening a demat account. To open your demat account, you need to submit a request for the same with a Depository Participant (DP) who is registered with central depositories like the Central Depositories Services India Limited (CDSL) and National Securities Depository Limited (NSDL). 

• Obtaining your Demat Account Number

Once your demat account application is approved, your account will be opened with a unique 16-digit account number that consists of an 8-digit Depository Participant Identification (DP ID) and your 8-digit client ID. This account number is crucial because it represents the demat account you hold with the central depository of your choice. Ensure that you do not misplace it or share it with the wrong people.

• Storing Your Shares and Securities Electronically

After opening your demat account, you will find that any shares you already hold as physical certificates can be converted to electronic format and stored safely in this digital repository. Any new shares and securities you buy will also be held electronically in your demat account. 

• Trading Your Holdings

To trade in the share market, you need to link your demat account with a trading account. Only then can you buy and sell shares actively in the secondary market via stock exchanges like the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). That said, you can still buy shares with just a demat account via the primary market, where you can invest in IPOs, and sell shares in the over-the-counter (OTC) market.  

Buying and Selling Shares in the Equity Market

You can buy shares in the primary or secondary market. However, selling shares is only possible in the secondary market. To understand how to buy shares through your demat account and how to sell the shares from your demat account, let’s take a closer look at how a trading account and a bank account also play crucial roles in share trading. 

Your Demat account is linked to a trading account, which you need to open with a stock broker of your choice. Today, most leading stock brokers are also registered Depository Participants (DPs), so they offer 2-in-1 accounts that combine the facilities offered by both demat and trading accounts. The trading account then needs to be linked to your bank account, so funds can be debited and credited as required.

• Buying Shares in the Equity Market 

If you are buying shares in the primary market, a demat account alone is enough because you can use the Applications Supported by Blocked Amount (ASBA) method to invest in an IPO. However, if you are buying shares in the secondary market on the stock exchange, the shares will be purchased through the trading account, and the required funds will also be debited from your trading account. These funds will be made available from the linked bank account. 

• Selling Shares in the Equity Market 

You can also sell the shares in your demat account in the secondary market, via the stock exchange. The sale is also executed through your trading account, and the funds obtained for the sale are credited to the same account. You can then transfer the funds to your linked bank account.  

Purchasing Equity Shares Through a Demat Account

You can buy shares in the secondary market using your demat-cum-trading account. When you place a buy order, you will receive a confirmation from your stock broker. The shares will typically reflect in your demat account within T+2 days. 

While this sums up the overview of purchasing equity shares, you need to know how to purchase shares through your demat account. Here is a step-by-step guide to help you with this. 

• Step 1: Select a stock broker who is also a registered DP, and open a demat and trading account with them. 
• Step 2: Place an order for the shares you wish to buy on the stock broker’s trading platform. 
• Step 3: When you do this, the requisite amount is debited from your trading account and credited to the stock broker’s account. 
• Step 4: The funds are then transferred to the clearing corporation. 
• Step 5: Meanwhile, the shares you wish to purchase will be credited to the broker’s account. 
• Step 6: The stock broker will then instruct the Depository Participant (DP) to debit their clearing account and transfer the shares to your demat-cum-trading account. 

To allow the shares to be credited to your account without any hassle, make sure to give the necessary authorisation to your DP and your stock broker. 

Selling Equity Shares Through a Demat Account 

Now that you know the key details about how to buy shares through your demat account, let’s take a closer look at how to sell the shares from your demat account. 

• Step 1: Here too, you need to first choose a stock broker who is also a registered DP to open a demat and trading account. 
• Step 2: Place an order on the stock broker’s trading platform to sell the shares held in your demat account. 
• Step 3: When you do this, the DP will debit the shares from your account and credit them to the stock broker’s clearing account. 
• Step 4: Once the request for the sale of your shares is approved, the funds for the sale will be transferred by the broker to your trading account. 

Important Things to Keep in Mind Before Trading Shares via a Demat Account

Purchasing and selling your shares through a demat account can be an efficient and secure way to invest in the stock market. However, before you start trading, there are some important things you should keep in mind to ensure you make informed trading decisions and have a smooth trading experience. They include the following: 

• Research and Education

Before you start trading, you need to educate yourself about the stock market, various trading strategies and the companies you want to invest in. Knowledge about the financial markets, economic indicators and company fundamentals will help you make informed decisions about buying and selling shares.

• Risk Management

It’s also essential to understand that trading in the stock market carries a certain degree of risk, and there are no guarantees of making profits. So, always be careful about the amount that you put in the stock market, and use stop loss orders to limit your losses as much as possible. Additionally, it’s also important to develop a dynamic risk management strategy to limit losses.

• Stock Broker Selection

A Demat account is a must-have for holding shares in the electronic format. But to facilitate seamless purchase and sale of shares, it must be linked to a trading account, as mentioned above. You need to choose a reputable and reliable stock broker to open your demat and trading account — ideally, someone with a good track record and user-friendly trading platforms. 

• Demat and Trading Account Charges

You should also familiarise yourself with the charges associated with your demat and trading account, such as account opening fees, annual maintenance charges (AMC), transaction fees, and other applicable charges. It’s always advisable to compare different brokers to find the most cost-effective option.

• Trading Platform

Lastly, take the time to understand how the trading platform provided by your broker works. Ensure that you are comfortable with its features, order types and execution speed. Most leading stock brokers today offer intuitive mobile applications that make buying and selling shares easy and hassle-free. 

Conclusion

This sums up the fundamentals and the details of how to buy shares through your demat account and how to sell the shares from your demat account. If you do not have a demat account yet, you can open one with your preferred and trusted stock broker online and get started with trading shares in the equity market.