Demat account stands for dematerialization account, and it was first launched in 1996 in India. Since then, the landscape of the Indian stock market has changed. It changed the investing scene from a physical trading system to an electronic trading system. This eliminated the risk of losing physical share and reduced the chances of fraud, theft and loss. Today, you can’t trade/invest in a stock market without a Demat Account.
On this page, you will learn more about the Demat account, its advantages, disadvantages and whether you should have a Demat account or not. So, let us now move ahead and check out the other sections.
🤔 What is a Demat Account?
A Demat account is like a bank account, but instead of money, you store share certificates in this account. The securities are stored in an electronic format. The Demat account is also used for holding ETFs, bonds and insurance. The Demat account was introduced to have an electronic trading system. This has eliminated any paperwork which was earlier required for trading. The settlement cycle has reduced, and it has also reduced the chances of losing or theft of share certificates. All your assets stay under your name in your Demat account.
Who Is Eligible For A Demat Account?
If you’re an Indian citizen over the age of 18 and are legally allowed to enter into a contract, congratulations! You’re already eligible to open a Demat account and start your journey to financial freedom.
👍 Advantages of Demat Account
Let us now look at all the benefits offered by the Demat account. Below are the details.
- Complete Control of Trading – When you have a Demat account, you are not dependent on the broker to make calls. This way, you stay in total control of your investments. You can track the market in real time and make investment decisions in real time. Apart from this, you can do the fundamental and technical analysis yourself.
- Safety of Shares – The securities purchased are visible to you and are in complete control. There is no ambiguity, and you don’t have to worry about misusing your shares. With the Demat account, you can get a loan on your holdings without any issues.
- Faster & Easier Settlement – With the Demat account, you benefit from a faster and easier settlement. You don’t have to depend on the broker or your agent to give you reports and share the settlement statement daily. All your funds can be tracked, and your trades are settled per the actual trading cycle.
- Quick Transactions – When you compare this with the traditional broker model, the transactions are fast. In the conventional model, you must call the broker and request a trade. Whereas, with the Demat account, you can make the transactions almost immediately by using the Demat account or the portal provided by the company.
- Multiple Instruments – You can trade in various instruments with your Demat account. You can trade in forex, commodities, futures & options and stocks. All these trades are available under one platform, which is the best part about having your Demat account.
- Reduction in Error – While communicating with your broker, there are chances that the broker will make an error while keeping the order. When you have your Demat account, you are in full control, and you can ensure that there is no error because of a communication gap or something similar.
- Multiple Mode of Trading – Most DPs offer services via a mobile platform, web platform and desktop application. You can trade on the go; hence, you get more flexibility when you have a Demat account. If you don’t have a Demat account and are dependent on a broker, you can only trade by calling the broker.
- Higher Liquidity – As soon as you sell the security, the funds are credited to your Demat account. This way, you can use the amount to make another trade. This sometimes becomes difficult when you are dealing with the broker.
- Reporting Capability – You get better reporting capabilities with the Demat account. You can track your returns, trades, strategies and many other things when using the Demat account. This also helps you while preparing financial statements or while calculating income tax.
- ITR Verification – The last point that we would like to mention is that your Demat account can be used to validate your ITR. When you file the ITR, you get an option to validate the ITR using the Demat account. This is just another way to validate the ITR.
👎 Disadvantages of Demat Account
Check out the drawbacks of the Demat account below.
- Knowledge of Trading – You need to know about trading to use the Demat account. You need to understand the technology, and you also need to understand the market. Without that, you are just going to enter into a gamble.
- Need Attention During Input – During the trade input, you must be cautious of typing errors. Otherwise, you may end up losing money on the trade.
- Transaction Cost – You need to understand the transaction cost associated with the Demat account. Some DPs have a higher transaction cost, while others have a lower cost. Ensure that you check out these details before opening the account.
- Urge to Trade – With the Demat account, you may have the urge to trade. Ensure that you understand your risk appetite and make calculative trades. Don’t just make a trade for the sake of it.
Should I Invest Using a Demat Account?
To invest in the Indian stock market, you must open a Demat account. There are many broker services which can help you open a Demat account. These brokers or agents are referred to as depository participants (DP). It is easier to open an account with DP. Some DPs even offer a very low brokerage commission. This helps you improve your profit margins since you pay little in the brokerage. Today, it is possible to open a Demat account online without paperwork. The KYC is also done electronically. With so many advantages, you must have a Demat account for yourself.
Demat Account Frequently Asked Questions
Q1. How Do I Open A Demat Account?
Ans: Well, for that either you can go to the depository participant or just use online Demat platforms. You will need your documents like a PAN card, Aadhaar, and a passport-sized photograph by your side for identity verification purposes. Once everything is in order, the DP or Demat platforms will activate your account and you’re good to go!
Q2. Is It Possible To Invest In Stocks Without A Demat Account?
Ans: Sorry, but without a Demat account, you can’t buy and sell shares and securities in the Indian stock market. Think of a Demat account as the key to unlocking your investment potential!
Q3. Is A Trading Account And A Demat Account The Same Thing?
Ans: That’s a common misconception. A Trading account is like a driver’s license, you use it to buy and sell shares in the stock market. A Demat account, on the other hand, is where you park your shares, safe and secure in electronic format.
Q4. Do I Need A Demat Account To Invest In SIPs?
Ans: Well, currently you don’t need a demat account to invest your money into SIPs, and that’s only possible because of the technological advancements in the fintech world. However there are some online brokers that you can sign up with and have a demat account, and with their platform, you can also invest in SIPs, quite easily.
Q5. What Are The Major Fees I Would Have To Pay If I Open A Demat Account?
Ans: The fees for a Demat account can vary depending on who you go with, banks or brokers. But don’t worry, the fees are usually reasonable and include account opening fees, annual maintenance charges, and transaction fees for buying and selling shares. It’s a small price to pay for the convenience and peace of mind that comes with having a Demat account!
Q6. What If The Demat Account Holder Is Not Around Anymore?
Ans: In the sad event that the demat account holder passes away, the nominee or legal heir can still access the electronic insurance policy. The process is simple, just provide the necessary documents and follow the claim process set by the insurance company.
This was all about the Demat account. If you have any physical shares you inherited from your family members, you can get them converted to electronic form using the Demat account. Your broker or the DP can help you with the same. Please contact us if you have any other questions about the Demat account. We will be happy to assist you. Lastly, please remember that all investments are subjected to market risk. Please take investment decisions with proper knowledge.