Dematerialisation is the process by which your holding of physical share certificates is converted into an electronic record. What that means is that just as a bank holds your money in a savings account, the record of your share holdings is held by an institution called a depository. Demat shares are an electronic record, so there's no question of their being fake. Nor need you worry about bad deliveries. There is no physical share certificate and hence no need to find a safe place to keep it under lock and key.
The introduction of dematerialisation has also allowed us to dispense with the concept of marketable lot-even one share can be bought or sold. In the old world of physical certificates, typically shares could be traded only in lots of 100.
Demat is great for small investors, as it enables them to buy even shares with high rupee prices. It also gets rid of the problems relating to odd lots that typically trade at a discount. Next, bonus/rights shares allotted to you can now be immediately credited to your account-no problems of getting the scrips through the post, the certificates getting lost, etc.
And what's more, you can receive the statement of account of your transactions/holdings periodically, just like a bank statement.
The biggest advantage of demat is that it has resulted in a drop in transaction fees charged by brokers. Why? Because their hassles and the risk of shares turning out to be objectionable, fake, forged, etc. are vastly reduced.
As you might have noticed, the whole depository and demat business, despite the forbidding jargon, is just like operating a bank account where shares, instead of money, is kept.