What is dematerialization (DEMAT)?
Dematerialization (DEMAT) is the transition from physical certificates to electronic accounting. The real share certificates are then withdrawn and withdrawn from circulation in exchange for an electronic registration.
How dematerialization works
With the age of computers and the Depository Trust Company, securities no longer need to be in the form of a certificate. They can be saved and transferred electronically.
Thanks to dematerialization, so-called DEMAT accounts allow electronic transactions when stocks are bought and sold. Within a DEMAT account, the user’s share certificates and other securities are held as a means of carrying out seamless transactions.
[Important: The introduction of dematerialization allowed for accounts to be updated automatically and swiftly.]
In earlier times, the stock market transactions were carried out by traders who shouted the purchase and sale prices. The transactions were recorded on paper receipts. After the markets have closed, administrative formalities would continue in order to correctly record all transactions.
The introduction of dematerialization has eliminated such a paper-based process. In addition, by adopting electronic accounting, this enabled automatic and rapid updating of the accounts.
The advantages of dematerialization
Dematerialization applies not only to stocks, but also to other forms of investment such as bonds, mutual funds and government securities. Using dematerialization and DEMAT accounts is comparable to using a bank and bank accounts to hold assets rather than storing and personally exchanging paper money every time a transaction is made.
Using a debit card in a store creates a digital record of a purchase and the amount is deducted from the card holder’s account. The funds are exchanged between the buyer and the seller without paper money. Similarly, with dematerialization, stock market transactions are carried out without physical certificates.
[Important: Brokers or other intermediaries will typically retain the electronic records of the transactions associated with the assets.]
If the holder of a physical, paper or other guarantee wishes to dematerialize the document, he generally hands over the certificate to an intermediary. They should receive some sort of electronic notification that the registration has been dematerialized and they can proceed with transactions.
Some assets – for example, publicly traded stocks – require a DEMAT account to carry out transactions and other transactions. Indeed, the markets now operate via electronic transactions rather recorded on paper.
The benefits of dematerialization can also include increased transaction security and security and the elimination of steps that could slow the transaction clearing process. Errors can be avoided which could otherwise be introduced in the management of physical records. There could also be savings by eliminating red tape that could have included processing fees.
Key points to remember
- Dematerialization (DEMAT) is the transition from physical certificates to electronic accounting.
- DEMAT accounts are required by some business institutions as they are the most accurate form of record keeping.
- The dematerialization was designed to offer more security and an increased speed to financial transactions. It has become the standard in accounting for financial institutions.