Though the company is under obligation to offer the securities in both physical and demat mode, you have the choice to receive the securities in either mode.
If you wish to have securities in demat mode, you need to indicate the name of the depository and also of the depository participant with whom you have depository account in your application.
It is, however desirable that you hold securities in demat form as physical securities carry the risk of being fake, forged or stolen.
Just as you have to open an account with a bank if you want to save your money, make cheque payments etc, Nowadays, you need to open a demat account if you want to buy or sell stocks.
So it is just like a bank account where actual money is replaced by shares. You have to approach the DPs (remember, they are like bank branches), to open your demat account.
Let's say your portfolio of shares looks like this: 200 of IFCI, 50 of ABB, 2000 of IQMSSOFT and 100 of ACC. All these will show in your demat account. So you don't have to possess any physical certificates showing that you own these shares.
They are all held electronically in your account. As you buy and sell the shares, they are adjusted in your account. Just like a bank passbook or statement, the DP will provide you with periodic statements of holdings and transactions.
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