Demat Account is the account used to hold securities in an electronic format. A Demat account is short form for Dematerialised account. The main purpose of trading with a Demat account is to keep shares that have been converted from physical to electronic shares. Share trading becomes easy with a Demat account. The Demat account will keep all the investments in this account from shares, government securities, bonds, mutual funds, and exchange-traded funds in one place along with the convenience of trading in different markets and geographies.
Dematerialization is the method of changing the physical share certificates into electronic form. This is a much easier method to maintain and easily accessible from anywhere around the globe. The investor who wants to trade has to open a Demat account online with a depository participant (DP). The reason for dematerialization is to curb the requirement of the investor to hold physical share certificates and allow the convenient monitoring/trading of holdings.
Pros of Demat Account:
- Holding physical certificates piles up a lot of paperwork. However, with Demat accounts securities can be stored electronically. This makes the process of online trading easy and convenient.
- Demat accounts reduce the case of forgery to a great extent. When the securities are traded physically it involves a heavy risk of fake securities, theft, forgeries. Additionally, transaction issues like delays or bad deliveries.
- Demat account facilitates a quick transfer of securities. Traders when locating a favorable opportunity, can make a transaction easily. A trader can avail the benefits from the smallest shift in the financial market.
- With a Demat account, one can buy or sell a single share as well. This is a good thing for those investors who are in the early stage of stock trading and do not want to bear much risk.
- The changes can be easily done in the Demat account with the help of a depository participant. The information will be simply updated with the respective companies you are trading.
- Demat accounts can be easily used to hold different forms of securities. The equity, debt securities, gold, and ETFs can be stored in the Demat account easily.
- No stamp duty charges are required.
- The shares in demat account can be pledged to avail loan against securities. In that case the demat account holder continues to be the owner of securities, however they are blocked for transactions. Once the loan amount is repaid the securities get unblocked.
- If the company whose shares are held in Demat Account, announces share spilt or bonus payout, the same gets reflected in Demat Account automatically.
Cons of Demat Account:
- In the case of dematerialized securities, trading may become uncontrolled at the investor’s end.
- The capital market is required to keep a regular check on the trading in the securities that are dematerialized. The trading should not act as a limitation for the investors.
- Different regulatory frameworks as per the laws make the process a little cumbersome.
- Additionally, a lot of agreements in the levels of dematerialization makes the investor confused and makes the process complicated.
- The Demat account charges are usually free of cost but the brokerage firm might recover the free advantage by expensive brokerage charges. The brokerage fees can be either in the form of percentage commission or flat fee brokerage.
Though opening a Demat account can seem daunting at first, it becomes challenging to specific traders, but the benefits of a Demat account are much more important. While investors and traders can take the benefit of an all-in-one account through which they can trade and invest in multiple securities.