A Demat Account is a vehicle to keep shares and securities in a digital form. The term “Demat” is an abbreviation of dematerialised, which means essentially that your paper share certificates are turned into an electronic format.
In the past, investors were given physical share certificates. These were not only risky to keep but also very easy to get damaged or lost. Opening a Demat account is the solution to this problem as it stores everything digitally and securely. Nowadays, if you wish to trade shares in India, it is compulsory to have a Demat account. It is similar to a bank account – except instead of money, it holds your shares, bonds, ETFs, and other securities.
In case you purchase shares through a trading platform, those shares will be credited to your Demat account. When you decide to sell them, the shares will be automatically debited. The entire transaction is quick, efficient, and clear. In this blog, we will explore different types of demat accounts and shares in India.
How a Demat Account Works?
A Demat account is connected to your trading account as well as your bank account. The three accounts together function. The process starts when you place a trading order. Once the order is done, the shares are transferred to your Demat account. The payment is made from your bank account. During the sale, the opposite will take place.
In India, Demat accounts are taken care of by the depositories NSDL and CDSL through the network of registered brokers and trading platforms. This system offers high security and accurate record-keeping of different types of shares.
Types of Shares in India
Now that you know what is demat account is, let’s understand different share categories. Shares represent a unit of ownership in a company. When investors buy shares, they become shareholders and share the profits, decision-making rights (in some cases) and asset claims of the company if it is wound up. Shares can be categorised into two broad categories and further sub-types based on rights, features and capital structure.
Ordinary Equity Shares (Common Shares)
Equity shares are the most common type of shares that are issued by companies to raise capital. Equity shareholders are part-owners of the company and may receive dividends, which are not fixed and depend on the company’s performance.
These shareholders often possess voting rights, which enable them to vote on corporate matters and also allow them to elect the members of the board of directors. Ordinary shares are further classified on the 2 basis of two criteria:
Sub-types of ordinary equity shares based on the definition:
- Authorised share capital: It represents the sum of funds which a company is capable of raising through stock issues, as per the Memorandum of Association (MoA).
- Issued share capital: Issued share capital is just the term for the funds which the firm has raised by issuing shares.
- Subscribed capital and paid-up capital: These terms are used for the share capital that the investors have agreed to buy. At times, investors do not buy all the shares that the company has issued.
Sub-types of ordinary equity shares based on features:
- Voting shares: Allow shareholders to vote in corporate matters.
- Non-voting shares: Do not have voting rights.
- Sweat equity shares: Issued to employees or directors as part of the compensation for their services or contributions.
- Right shares: Offered first to existing shareholders at a discounted price before being issued to the public, allowing them to retain their share of the company.
- Bonus shares: Extra free shares issued to existing shareholders from the company’s reserves.
Preference Shares (Preferred Stock)
Preference shares are a type of shares that grant rights or preferences to their holders over ordinary shareholders, particularly for dividends and repayment of shareholders in case of company liquidation.
Preference shareholders receive fixed dividends prior to any distribution to equity shareholders and have precedence over equity in the distribution of assets in the event of winding up of the company.
Sub-types of preference shares:
- Redeemable preference shares and irredeemable preference shares: Redeemable shares can be purchased back by the company at a predetermined time, while irredeemable shares remain outstanding permanently, unless the company changes its structure.
- Convertible and non-convertible preference shares: Convertible preference shares can convert into ordinary equity shares after a specified time. In contrast, non-convertible preference shares cannot be converted.
- Participating preference shares and non-participating preference shares: Participating preference shares enable the preference shareholders to receive a portion of the surplus profits, while non-participating preference shares only receive a fixed dividend.
- Cumulative & non-cumulative preference shares: Cumulative shares include accumulated unpaid dividends for later payment. On the other hand,non-cumulative shares do not add up the unpaid dividends.
Final Takeaway
A demat account is really the base of today’s investment in India. It has made shareholding, and things like share transfer, super fast, safe and done without paper. Knowing the different types of demat accounts helps you decide on the right account according to your investment strategy.
Using a technology-driven platform, traders and investors deal with this whole thing very nicely and efficiently.
