Demat account is mandatory to trade in shares, bonds, and Exchange-Traded Funds (ETFs). In India, many reputed brokerage houses, such as 5Paisa, provide free Demat account openings to trade seamlessly in the Indian stock market.
Stockbrokers may open Demat accounts, but these accounts are actually maintained by depository institutions such as the National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited (CDSL). When you buy shares, they are stored in your Demat account, and likewise, they are debited from the same account when you sell them.
Advantages of a Demat Account are:
- Safe Storage
A Demat account allows you to eliminate the hassles associated with storing physical share certificates, which are prone to theft or damage. Now, you can securely store your shares in a Demat account and access them whenever you want. Moreover, since your shares are held in custody by NSDL and CDSL, you can have complete confidence in their safety.
- Ease of Access
You no longer need to visit your broker to sell shares. Nowadays, you can hit the ‘Sell’ tab on an online trading app and sell them instantly. Also, the proceeds from the sale get transferred to your account within two days from the date of sale.
- No-Error Trades
In the past, the share certificates were physically prepared by the staff assigned for the purpose. Hence, the possibility of manual errors could not be ruled out. Error trades even had a term known as “Vanda” trades. An online Demat account ensures error-free transactions. You can easily check the price at which you bought stocks, and the orders get executed instantly
- Transfer of Rights
Presently, a Demat account holder's nominee can easily claim ownership or withdraw the funds if the account holder passes away. However, in the past, a nominee had to undergo a series of steps to liquidate the share certificates.
- Multiple Financial Instruments, One Solution
A Demat account makes it easy to store multiple investment instruments, such as shares, bonds, debentures, ETFs, Unit-Linked Insurance Plans (ULIPs), and even Sovereign Gold Bond units. Hence, you can open a Demat account to conveniently check the status of your investments and restructure your portfolio.
Disadvantages of a Demat Account are:
- You Have to Spend Money to Maintain a Demat Account
When you open a Demat account, you may have to pay an account opening fee to the broker. The broker passes a fee percentage to the depository institution to maintain your account. This fee helps them in maintaining and managing these establishments. Additionally, you should be prepared to pay an annual maintenance fee, custodian charges, and transaction charges every time you sell an asset.
Fortunately, 5Paisa offers eligible Indian investors the advantage of free Demat and trading account opening. Moreover, 5Paisa’s low brokerage fee gives you ample room to maximize your profits.
- An Uncontrollable Urge to Trade
A Demat account sometimes makes trading too tempting. New investors are often influenced by “expert” advice and suggestions from their friends and relatives when making investment decisions. Since trading has become easy, some investors don’t think twice before buying or selling assets.
This habit increases the probability of incurring losses and disrupts their long-term financial goals. While a Demat account is not directly responsible for capital loss, an uncontrollable desire to trade more due to technological convenience or traders' psychology could be the main reason for the loss.
- Technology Might Be an Impediment
Since trading and investing have become technology-driven, many people find it too complex. However, this is not a big deal as 5Paisa also offers a call-and-trade facility, allowing investors to buy and sell assets over a simple phone call.
- Unscrupulous Experts
Many investors complain that they receive calls from self-proclaimed market pundits and expert investors claiming to provide unreal returns in exchange for access to their Demat accounts. However, most of these agencies are not approved and authorized by the Securities and Exchange Board of India (SEBI) under the Finance Ministry to offer such services. It is wise to check SEBI’s website to find the list of unscrupulous/banned financial advisors and refrain from placing trades based on their advice.
Although Demat accounts have some pros and cons, the advantages outweigh the cons. 5Paisa regularly publishes articles to help readers stay informed about the latest industry updates. It is important to read these articles to stay ahead in the race by making informed decisions.