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Two decades into the Electronic Trading era

Two decades into the Electronic Trading era

In the buzzing fast-paced world, people are always on the look-out for lucrative investment deals to make a quick buck. To satiate this growing desire for value enhancement, economic activity gave shape to a plethora of financial instruments. These instruments, crafted by banks and regulatory institutions give us access to indulge in a sophisticated system of trading and investment.

The most popular and dynamic aspect of the modern financial world is the stock exchange. The stock exchange acts as a platform for trading shares of publicly listed companies. For years, the stock exchanges operated on an open-outcry system, giving out physical certificates for shares.

A modern wave swept the mid- 1990s, replacing this system was by an electronic system for trading of shares where special types of accounts came into existence.

Trading and Demat Accounts

A trading account started being used for the purpose of sale and purchase in the stock market. This process, of moving from ownership of physical certificates to trading shares online – ushered in an era of ‘dematerialisation’- or ‘Demat’. Thus, another account known as a ‘Demat account’ came into existence.

The Demat account is used to store all the stocks that the user holds in an electronic format. While Demat acts as storage, the trading account acts as an intermediary between the bank account, the stock market, and the Demat account. In common sense, the trading account can be thought of as a wallet, while the Demat account can be thought of as a locker. To engage in trade in the stock market, one must first transfer funds from the bank account to the trading account. When stocks are bought or sold, cash is accordingly deducted from or deposited to the trading account.

Similarly, whenever stocks are bought or sold, stocks are deposited to or taken from the Demat account. For ease of trade, the trading and Demat accounts are linked, although they could be under different broking firms. Some institutions have also recently come out with a consumer-friendly system of a 3-in-1 offer: A package deal of trading, Demat and banking accounts offered by the same financial institution. Meanwhile, there are some share advisors associated with every Demat Account who can guide the user on how to buy shares online and maximize profits.

De-materialization and beyond

When de-materialisation began with the exchanging of certificates for electronic shares, a huge amount of fake certificates surfaced. This reflected how skewed the market statistics were, considering companies had more number of shares floating in the market than were actually listed.

De-materialisation helped in reducing settlement risks as transactions became more transparent. This led to the up-gradation of the system of clearing and settlement. Initially, market agents were quite wary of the electronic system. The physically held shares held more liquidity as compared to the electronic ones, which made certificates a more popular mode. The Depository Act of 1996, brought in by SEBI (Securities and Exchange Board of India), made it a must for equity investors to have a Demat account. This facilitated the shift to the electronic mode, which was accelerated further when SEBI made it mandatory to hold shares in the Demat form for promoters of all listed companies.

Once the traders realized the ease and speed that came with online share market via the trading and Demat accounts, the volume of shares bought and sold soared. The electronic trading age brought with it an unprecedented dynamism. Price discovery became more efficient and hence analysis became more accurate. The electronic era also gave birth to the National Securities Depository Limited (NSDL)—India’s first and largest repository of electronic securities. The NSDL today, boasts of housing Demat accounts exceeding a count of 1.5 crores (as of December 31, 2016). Even though this is a huge number, it is just a stepping stone for a fledgling financial market like India’s, which is yet to burst into full flight.

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