In simple words “Demat” means “de-material” or something which is not material or we can say electronic. A demat account is an electronic account to hold shares & other permitted financial investments without having the physical receipts or certificates. To make it easier to understand, Demat account is like your Bank Account but in your Bank Account you keep money whereas in Demat Account you keep shares. Today, Demat account is mandatory to trade into Indian stock markets and hence the first step to trade in equities or stock market is to open a Demat account. Before you think of opening a demat account, you know the advantages and disadvantages of Demat account. Let’s look at some of them –
- One key benefit is that you do not need to hold shares or securities in physical form or hard copy rather they are kept in electronic form. Hence the risks of losing shares due to theft, or damages are eliminated. So we can safety of investment is the first benefit out of Demat Account.
- You can have instant transfer of stocks from one demat account to another, similar to the funds flowing between bank accounts.
- For buying and selling shares or stocks it is mandatory as when you buy the stocks come directly to your demat account & in selling they are going from your demat account. So the whole trading & settlement process becomes fast which in turn increases the efficiency and effectiveness of stock market.
- Since stocks are hold in electronic form, hence at the time of transfer, there is no stamp duty on transfer of securities which reduces the transaction costs for you.
- The myth is that Demat account is only for shares but the fact is you can not only keep equity shares but you can keep mutual funds, gold exchange traded fund, preference shares in it which makes it easier for you to keep track of your investments.
- With the facility of demat account, you can even trade for 1 share also which was not the case when you hold them in paper form as you were supposed to buy in lots/certain quantity.
- One Primary disadvantage is that Demat Account normally comes with a cost. You have to pay certain Annual Maintenance Charges to avail the facility of a demat account. These charges vary from broker to broker and off late there are banks or brokers who have life time free or life time charges demat account. So choose the demat account plan wisely.
- Another limitation is that in order to reap out the actual benefits of demat you have to be a little techno savvy at least. You should be able to check your portfolio, understand holding statements etc. and keep checking your demat account periodically else there are cases of wrong transactions and mismanagement of stocks by the sub brokers or financial advisor.
- Another side effect is that since stocks are de materialized & buying/ selling is just a click or call away, you tend to keep looking the stock price more often therefore your trading behaviour changes & investment horizon tends to shorten quickly. Learning & Patience is the key to overcome these disadvantages.