What is the key requirement for investment and trading in stock markets? Most answers to this question include the need for a successful investment strategy, adequate investment funds, risk analysis, return perception, etc. However, the starting point for investment and trading in stock markets is opening a Demat account. Without this, it is impossible for investors and traders to begin to create a successful portfolio.
With this backdrop, given below is the meaning of the Demat account and its pros and cons.
What is a Demat account?
First, let us begin with the meaning of this account. A Demat account is an account opened by the investor and trader with a registered broker. This account holds the securities bought and the positions held by them in a dematerialized format. Earlier shares and securities were held in physical format. However, as per the amended guidelines of SEBI, such securities have to be converted from their physical format to dematerialized format for their successful purchase, holding, selling, and transfer from one holder to another. The cost of opening a Demat account varies from broker to broker. However, this cost is quite nominal on account of increased competition as well as the guidelines of SEBI in this regard.
Read More: Is Intraday trading possible without a Demat account?
What are the benefits of a Demat account?
We have established that the Demat account is the starting point for any investors or traders to begin their journey in stock markets. Let us now look at the various benefits of opening a Demat account.
- Ease of investment and access
The first and foremost benefit is the ease of the investment process. With the securities being dematerialized, investors and traders can take suitable positions online on a real-time basis and make quick trades which was earlier a bit difficult. This allows them to take advantage of the price fluctuations happening every minute and thereby maximize their portfolio returns. Also, most brokers provide a detailed breakup of the assets held by the investors and traders which helps them understand their holdings with respect to the sector-wise breakup, asset allocation, assets held across different market capitalizations, etc. These details help the investors and traders better understand their style of investing and also evaluate their performance with respect to the overall market.
- Safety from loss due to theft or fraud
When the securities are held in the Demat form, the chances of losses due to theft of securities or due to any fraud is greatly reduced. The security system of the brokers is quite effective to reduce any chances of unauthorized access thereby protecting the investors’ holdings and their ultimate interest.
- Transparency of transactions
Having a Demat account increases the level of transparency in the transactions as they can be reviewed and accessed at any point and from anywhere. Also, the brokers are required to have a periodic and timely audit of their accounts which further adds to the level of transparency maintained by them with regard to any charges or penalties levied on the accounts.
- Time-saving
Demat account reduces the time and efforts of the investors with respect to formalities needed as per the guidelines of SEBI. Brokers are required to provide a detailed statement of accounts at the end of every month as well as the quarter and yearly reports. This ensures ease of compliance with other regulations like filing of Income Tax Returns without any hurdles of compiling the data of transactions throughout the year and calculating the profit and loss on the account.
- Removing any odd-lot problems
Earlier when the securities were not dematerialized, investors and traders would have to face the problems related to odd lots that would often pose a hindrance in trading and investing activities. Now with the digitization of securities this issue is resolved.
- Single storage area for all assets
Most investors believe a Demat account can be used to hold only equity shares of any company. However, that is not the case as a Demat account can be used to hold multiple assets like shares, bonds, debentures, G-secs, mutual fund units, ETFs, etc. This makes it easier for the investors to access all their holdings as well as ascertain their net investment portfolio value.
Read More : Difference between Demat and trading account
What are the disadvantages of a Demat account?
After focusing on all the advantages of opening a Demat account, let us now look at the various disadvantages of the same.
- Excessive costs
The cost of opening a Demat account, although nominal, increases the burden on the investors. Add to it any penalties on account of non-compliance with any mandatory requirements, and the ultimate cost of holding a Demat account increases for the investors which can eat into their net returns.
- Possibility of fraud due to dishonest brokers
Most investors and traders still use brokers’ help to place their trades which means the access to their account is with the brokers as well. Therefore, while opening a Demat account, investors and traders have to evaluate the broker and ascertain if the said broker is trustworthy and has a good reputation. This will help them in avoiding any unpleasant experiences or hassles if the broker is not honest and tampers with their holdings.
- Difficult for investors who are not technologically sound
With all the trading and investing happening in real-time, it becomes difficult for some investors and traders who are not technologically sound. This may lead to errors that can damage the portfolio value or lead to heavy losses if a wrong trade is executed due to a lack of understanding of the trading portal and the way it functions.
Conclusion
Trading and investing have become quite popular in the recent past, especially in the post covid period. Most broking forms including giants like Zerodha have reported a tremendous increase in the race to open Demat accounts. At one point Zerodha reported the opening of 50,000 new accounts in a single day. This increase is on account of increasing investor awareness and risk appetite and has also led to an increase in favorable market sentiments from time to time.
FAQs
Yes. Opening a Demat account for trading is a mandatory step to starting the process and creating a portfolio.
The KYC requirements for opening a Demat account vary from broker to broker as per their individual guidelines. However, the most common documentation needed includes a valid bank account, registered mobile number, email id, valid PAN card, and address proof (Aadhaar card/ passport, etc.).
Yes. A joint Demat account can be easily opened, however, KYC of all the joint holders is needed for such accounts.
Yes. As per SEBI guidelines, all the brokers are mandatorily required to provide the investors with the details of their accounts at periodic intervals like at the end of each month, quarter, and annually.
