Demat account is a mandatory requirement to trade in shares, bonds, and Exchange-Traded Funds (ETFs). Many reputed brokerage houses, such as 5Paisa, provide free Demat account opening to trade seamlessly in the Indian stock market.
Although stockbrokers open Demat accounts, they are maintained by depository institutions like the National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited (CDSL). When you buy shares, the shares get stored in your Demat account. Similarly, they get debited from the same account when you sell shares.
Some of the advantages and disadvantages of Demat account are:
A Demat account lets you move ahead of the hassles of storing physical share certificates. Physical share certificates were prone to theft or damage. Now, you can keep your shares in a Demat account and check them whenever you want. Moreover, since your shares remain in the custody of NSDL and CDSL, you can be one hundred per cent certain about their safety.
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.
In yesteryear, the share certificates were physically prepared by the staff assigned for the purpose. Hence, the possibility of manual errors could not be ruled out. The error trades even had a term, ‘Vanda’ trades. An online Demat account ensures error-free transactions. You can check the price at which you bought stocks, and the order gets executed instantly.
Transfer of Rights
The advantages and disadvantages of Demat account can never be complete without mentioning this point. Presently, a Demat account holders nominee can easily claim ownership or withdraw the funds if the account holder passes away. However, previously, 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 your Demat account to conveniently check the status of your investments and restructure your portfolio.
Now that you know the top advantages of a Demat account, let us understand the disadvantages of the same.
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. The fee helps them maintain and manage these establishments. You should pay an annual maintenance fee, custodian charges, and transaction charges every time you sell an asset.
Fortunately, 5Paisa offers free Demat and trading account opening to eligible Indian investors. Moreover, the low brokerage fee gives you enough room to maximise your profits.
An Uncontrollable Urge to Trade
A Demat account sometimes makes trading too irresistible. New investors often get swayed by ‘expert’ advice and suggestions from their friends and relatives to make investment decisions. Since trading has become as easy as 123, some investors don’t think twice before buying or selling assets.
This habit increases the probability of making 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 is undoubtedly a culprit.
Technology Might Be an Impediment
Since trading and investing have become technology-driven, many people find it too complex an endeavour. However, this is not a big deal since 5Paisa also offers a call-and-trade facility, where an investor can buy and sell assets over a simple phone call.
Many investors complain that they receive calls from self-proclaimed market pundits and expert investors claiming to provide insane returns against access to their Demat accounts. However, most of these agencies are not approved and authorised by the Securities and Exchange Board of India (SEBI) of 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 on their advice.
While Demat account advantages and disadvantages, the benefits far outweigh the disadvantages. 5Paisa regularly publishes articles and market guides to sensitise readers about the latest happenings in the industry. You must read such articles to stay ahead in the race by making informed decisions.