What is 'Dematerialization (DEMAT)'

Dematerialization (DEMAT) is the move from physical certificates to electronic book keeping. Actual stock certificates are slowly being removed and retired from circulation in exchange for electronic recording.

BREAKING DOWN 'Dematerialization (DEMAT)'

With the age of computers and the Depository Trust Company, securities no longer need to be in certificate form. They can be registered and transferred electronically.

Through dematerialization, so-called demat accounts allow for electronic transactions when shares of stock are bought and sold. Within a demat account, the certificates for stocks and other securities of the user are held as means for seamless trades to be made.

In earlier eras, transactions at stock exchanges were conducted by traders who shouted buy and sell prices. The deals were recorded on paper receipts. After the markets closed, the paperwork would continue in order to properly register all the transactions.

The introduction of dematerialization served to eliminate such a paper-oriented process. Furthermore, by adopting electronic bookkeeping, this allowed for accounts to be updated automatically and swiftly.

Other Ways Dematerialization Can Be Used

Dematerialization applies not only to stocks, but other forms of investment such as bonds, mutual funds, and government securities. The use of dematerialization and demat accounts is comparable to using a bank and bank accounts to maintain one’s assets rather than personally storing and exchanging paper money each time a transaction is made. Using a debit card at a store creates a digital record of a purchase and the amount is deducted from the cardholder’s account. Funds are exchanged between buyer and seller without paper currency. Likewise, with dematerialization, the stock transactions are completed without physical certificates.

Brokers or other intermediaries will typically retain the electronic records of the transactions associated with the assets.

If the holder of a physical, paper bond or other security wishes to dematerialize the document, they usually surrender the certificate with an intermediary. They should receive some sort of electronic notification that the record has been dematerialized and they may proceed with conducting transactions. Some assets, for example publicly traded shares, can require a demat account to engage in trades and other transactions. This is because markets now operate through electronic transactions rather recorded on paper.

Benefits of dematerialization can include increased security and surety of transactions and the elimination of steps that could slow down the process of clearing transactions. Errors can be avoided that might otherwise be introduced in the handling of physical records. There might also be some savings by eliminating paperwork that may have included processing fees.

RELATED TERMS
  1. Stock Certificate

    A stock certificate is a physical piece of paper representing ...
  2. Electronic Money

    Electronic money is money which exists in banking computer systems ...
  3. Cage

    The cage is the department of a brokerage firm that receives ...
  4. Electronic Funds Transfer Act

    The Electronic Funds Transfer Act is a consumer protection law ...
  5. Silver Certificate

    A silver certificate was a form of legal tender issued by the ...
  6. Depository

    A depository is a facility such as a building, office, or warehouse ...
Related Articles
  1. Investing

    The 4 Ways To Buy And Sell Securities

    Know the four main avenues of buying and selling investment instruments.
  2. Trading

    Basics of the Mechanics Behind Electronic Trading

    Once associated with shouting traders and wild hand gestures, now statistics and programmers rule.
  3. Investing

    An introduction to commercial paper

    Commercial paper, a type of interest collecting promissory note, is a short-term instrument that can be a viable alternative for retail fixed-income investors looking for a better rate of return.
  4. Trading

    Pros and Cons of Paper Trading

    Most market novices should try paper trading for a while, despite key drawbacks.
  5. Investing

    What is Accounting?

    Accounting is the recording of financial transactions of a business or organization. It also includes the process of summarizing, analyzing and reporting these transactions in financial statements.
  6. Small Business

    Best Checking Accounts For Small Businesses

    What you need to know to choose the best checking account for your small business – and where to look.
  7. Investing

    Commercial Paper

    Commercial paper is a short-term debt security issued by financial companies and large corporations. The corporation promises the buyer a return, or profit, for making the loan. The return is ...
  8. Financial Advisor

    How Brokers Are Compensated for Selling Bonds

    Find out how brokers are paid for selling bonds and how the transaction costs are passed on to the investor through a markup or commission.
  9. Retirement

    Certifications For Estate Planning

    Learn about considerations when choosing a career in estate planning. Find information about different types of certifications, and how to get them.
RELATED FAQS
  1. After a Stock Split, What Happens to Certificates?

    Find out why a stock split will have little effect on the holders of stock certificates. Learn how shares are held in electronic ... Read Answer >>
  2. What is the electronics sector?

    Learn more about the electronics sector, including the challenges and opportunities presented to electronics companies by ... Read Answer >>
  3. Why Are Securities Held 'In Street Name'?

    Buying or selling securities through a broker means they're held in your broker's name. Read Answer >>
Trading Center