As the demat accounts were introduced in India in 1996, the trading system shifted from physical to electronic form. The issues related to physical share certificates like damage, theft, forgery, and stamp duty charges got eliminated from the trading process. Nowadays, it is compulsory to open a demat account and trading account to trade online. A demat account holds your securities in electronic form and facilitates faster transactions and convenient monitoring of holdings. In this article, we will discuss the pros and cons of a demat account.
Pros of Demat Account:
These are some of the key benefits of a demat account:
Security and safety:
When financial securities are held in demat i.e. electronic form, there is minimal risk of them getting damaged or stolen. Also, it is easier to hold shares in a demat account as there is no need to care for their maintenance and safety. It is because demat account providers implement the latest security features like data encryption to fortify the safety of your holdings.
Quicker and seamless settlements:
Before the advent of demat accounts, the shares were transferred from the seller to the buyer physically. This extended the process and the trades took 14 days to settle. However, as demat accounts facilitate online transactions, it takes only T+2 (T refers to the transaction date) days to settle a trade. It is also easier to keep a track of all the transactions through a demat account.
Elimination of manual errors:
A lot of paperwork and manual processes were involved in offline trading. It not only extended the time required to settle the trade but also induced many manual errors in it. Demat accounts have eliminated manual errors and as a result, there has been a significant reduction in erroneous trades.
Easy liquidity options:
A demat account allows you to liquidate your assets easily to gather the required funds. You may either sell the securities or pledge them to take a loan. However, it is not easy to liquidate the assets when they are available in the form of physical certificates.
Resolved the odd lot problem:
When shares were traded physically, you had to buy them in specific lots. However, the introduction of the demat account made it possible to even purchase and sell a single share. This resolved the odd lot problem which emerged as one of the biggest benefits of having a demat account.
Ability to invest in various asset classes:
With a demat account, you can trade in equities, mutual funds, commodities, futures and options, and many other asset classes. This not only enables you to grab the earning opportunities available in the stock market but also allows you to diversify your investment profile. Diversification minimizes the risks associated with money market instruments.
Simple tracking and account management:
The transactions that are executed through a demat account get automatically recorded by the depository participant. Therefore, there is no need to maintain and track the records separately. It is also possible to reconcile the transactions at a later stage as you can download the account statement for a specific period from your demat account.
Cons of a demat account:
These are some limitations that you can encounter while using a demat account:
Brokerage and other costs associated with a demat account:
Though some brokers offer a free demat account to encourage trading, there are many who charge a nominal account opening fee. Also, the brokerage rates are applicable as per the services offered by the broker. Along with these charges, you need to pay AMC (Annual Maintenance Charges), custodian charges, and transaction charges while operating a demat account. All these costs make trading less lucrative, especially for retail investors.
Need to find a reliable broker:
Before participating in stock market trading, you need to find a broker who does not engage in any fraudulent activity. The brokerage and other charges must be transparent and the broker must adhere to the SEBI guidelines at all times.
Ease of trading lures investors to engage in risky short-term trades:
Though a demat account makes trading easier, it also attracts those with little or no experience in trading. Many retail investors lose their capital by taking short-term trades without conducting any prior research.
Need to be tech-savvy:
Investors who aren’t tech-savvy might find it difficult to operate their DEMAT accounts. It is because only those with some experience in handling mobile apps or laptops can handle the demat account with ease.
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