Trading Mechanism – Dematerialisation and Online Trading

Until the 1990s, shares in India were held and transferred as paper certificates. This physical system suffered from serious problems: certificates could be lost, stolen or forged, transfers took weeks to register, and a buyer sometimes received 'bad delivery' — a certificate that a company later refused to register due to a signature mismatch or physical damage.

Dematerialisation is the process of converting physical share certificates into an equivalent number of securities held electronically in a demat account, so that they can be transferred merely by an electronic book entry instead of the physical movement of paper.

Depositories and depository participants. A depository is an institution that holds securities in electronic form on behalf of investors. Every demat account is opened through a Depository Participant (DP) — usually a bank or a broker — who acts as an agent of the depository and is the investor's day-to-day point of contact.

Steps in demat and online trading

1. The investor opens a demat account (to hold securities) and a trading account (to place buy/sell orders) through a registered broker/DP.
2. Buy or sell orders are entered into the exchange's Screen-Based Trading System (SBTS), which automatically matches orders on the basis of price and time priority.
3. Once a trade is executed, the broker issues a contract note confirming the price, quantity and brokerage charged.
4. The trade is settled through the clearing corporation, with shares credited or debited to the buyer's and seller's demat accounts and funds moving through their linked bank accounts, normally on a T+1 settlement cycle (settlement one working day after the trade). …