Key differences between Demat Share and Physical Share

Demat Share

Dematerialized (Demat) shares refer to a method of holding shares in an electronic format, thereby eliminating the need for physical paper certificates. This digital form of shareholding facilitates easier, faster, and more secure transactions in the stock market. Investors open a Demat account through a depository participant (usually a bank or brokerage firm), which acts as an intermediary between them and the depository (such as NSDL or CDSL in India). Once an account is opened, investors can electronically buy, hold, and sell shares of publicly listed companies. The main benefits of Demat shares include reduced risk of loss, theft, or damage of share certificates, simplified trading and settlement processes, and quicker ownership transfers. Additionally, it supports the consolidation of portfolio management, making it convenient for investors to track and manage their investments. The shift to dematerialization has significantly improved the efficiency and transparency of the stock market operations.

Features of Demat Share:

• Electronic Form:

Demat shares exist in a digital format, eliminating the need for physical paper certificates. This digital approach reduces the risks associated with loss, theft, or damage of physical certificates.

• Ease of Trading:

Buying and selling of shares becomes quicker and more efficient in a Demat form. Transactions are executed online, facilitating immediate transfer of shares, which significantly reduces the settlement time.

• Safe and Secure:

The electronic holding of shares in a Demat account reduces the risk of fraud and unauthorized transactions. Advanced security measures and encryption protocols protect investors’ holdings.

• Convenience and Accessibility:

Investors can access their Demat accounts online, allowing them to manage their portfolio from anywhere at any time. This includes not only buying and selling but also monitoring the performance of their investments.

• Reduced Costs:

The elimination of paper-based processes means lower handling charges, no stamp duty for transfer of securities, and reduced transaction costs compared to physical share trading.

• Corporate Benefits Directly Credited:

Any dividends, interest, refunds, or other monetary benefits related to the held securities are directly credited to the investor’s bank account linked to their Demat account. Similarly, corporate actions like stock splits, bonus issues, etc., are automatically updated in the Demat account.

• Nomination Facility:

Demat accounts provide a nomination facility, allowing investors to nominate individuals who can claim the securities in the event of the account holder’s death, ensuring smoother transmission of assets.

• Consolidation of Investments:

Single Demat account can hold various types of securities, such as stocks, bonds, ETFs, and mutual funds, allowing for easier management and review of one’s investment portfolio.

• Loan Collateral:

Securities held in Demat form can be quickly and easily pledged as collateral for loans, providing investors with a means to secure financing based on their investment holdings.

Benefits of Demat Share:

• Reduced Risks:

Demat shares virtually eliminate the risks associated with physical certificates such as loss, theft, damage, or forgery. The electronic format ensures that your investments are securely stored in a digital environment.

• Quick and Efficient Transactions:

Trading in Demat shares significantly speeds up the buying and selling process. Since the transactions are electronic, they can be completed much faster than the traditional methods, enabling quicker settlement cycles.

• Lower Costs:

Handling charges associated with paper-based transactions are eliminated in the Demat system. Furthermore, the absence of physical certificates means no stamp duty fees for transfer, and transaction costs are generally lower.

• Easy Accessibility and Management:

Investors can access their Demat accounts online, making it convenient to manage and review their portfolios anytime, anywhere. This includes the ability to track performance, execute trades, and analyze investments with ease.

• Consolidation of Holdings:

A single Demat account can hold a variety of securities, including stocks, bonds, mutual funds, and government securities. This consolidation simplifies the management of diverse investment portfolios.

• Automatic Updates and Credits:

Corporate actions such as dividends, interest, stock splits, and bonus issues are automatically updated and credited to the investor’s account. This automatic process ensures that investors don’t miss out on any benefits due to paperwork delays or oversight.

• Loan Collateral:

Securities held in Demat form can be easily pledged as collateral to avail loans from banks and financial institutions. The electronic nature of these shares simplifies the process of verifying ownership and valuation, making it a convenient option for securing loans.

Physical Share

Physical shares represent ownership in a company or corporation but are issued in the form of physical paper certificates. These tangible documents detail the number of shares owned and include the shareholder’s name, the company’s name, and other relevant information like the share certificate number. Before the widespread adoption of electronic or dematerialized (Demat) systems, physical shares were the standard method for investors to hold and trade their equity investments. Trading physical shares involved manual processes, including the physical delivery of share certificates from the seller to the buyer and the subsequent transfer of ownership, which was recorded by the company. This method of holding shares is considered less efficient compared to the modern Demat system due to the risks associated with loss, theft, or damage of the paper certificates, and the longer duration required to complete transactions. Despite these drawbacks, some investors still hold shares in physical form, often for sentimental reasons or due to neglect in converting them into Demat form.

Features of Physical Share:

• Tangible Certificates:

Physical shares are represented by paper certificates. Each certificate includes details such as the investor’s name, the number of shares owned, and the issuing company’s information, making it a tangible record of investment.

• Manual Transfer and Settlement:

The transfer of ownership of physical shares requires the physical delivery of share certificates from the seller to the buyer. Subsequently, the transfer must be registered with the company, a process that can be time-consuming and paper-intensive.

• Risk of Loss or Damage:

Physical certificates are susceptible to risks such as loss, theft, or damage. Recovering or replacing lost certificates involves a cumbersome and often costly procedure, including furnishing indemnity bonds or completing other formalities.

• Storage and Safekeeping:

Investors are responsible for the safekeeping of physical share certificates. This necessitates proper storage facilities and sometimes incurs additional costs for secure vaults or safety deposit boxes.

• Stamp Duty:

Transferring physical shares may attract stamp duty, increasing the cost of transactions compared to electronic transfers, which do not incur such levies in many jurisdictions.

• No Automatic Updates:

In contrast to Demat shares, physical share certificates do not automatically reflect changes due to corporate actions like stock splits or dividends. Investors must manually process such updates, which can be cumbersome.

• Sentimental Value:

For some investors, physical shares hold sentimental value, serving as a tangible connection to the company or as a physical asset that represents their investment.

• Collectible Aspect:

Certain physical share certificates, especially those from historic companies or with unique designs, can become collectibles. This adds an extra dimension to their value, beyond the financial worth of the shares they represent.

Limitations of Physical Share:

• Risk of Loss or Damage:

Physical certificates are vulnerable to being lost, stolen, or damaged. The process to replace them is often cumbersome and may involve additional costs, including affidavits, indemnity bonds, and sometimes, even newspaper advertisements announcing the loss.

• Cumbersome Transfer Process:

The transfer of physical shares involves manual paperwork and the physical delivery of share certificates. This can significantly delay the transaction process compared to the instantaneous transfers possible with Demat shares. Additionally, errors in paperwork can further complicate and prolong the process.

• Storage and Safekeeping Concerns:

Owners of physical shares must take appropriate measures to store and safeguard their certificates, which may include securing a safe deposit box or other secure storage solutions, adding to the inconvenience and cost of holding shares in this form.

• Costs and Charges:

Transferring physical shares may attract stamp duty and other transfer charges, making it more expensive than electronic transfers. Moreover, the need for secure storage and potential replacement of lost or damaged certificates can add to the overall costs of owning physical shares.

• Lack of Immediate Access:

Physical shares do not offer the same level of quick access and liquidity as Demat shares. Selling physical shares requires finding the certificates, ensuring they are in order, and then physically delivering them, which can delay access to funds in fast-moving market conditions.

Key differences between Demat Share and Physical Share: