Introduction
Are you planning to open a Demat account or want to know about Demat account free opening? Are you confused about the process and whether or not your money will be safe in a Demat account? You are not alone. With a lot of misinformation available, Demat accounts can leave customers wondering if they should be using them at all.
What Is A Demat Account?
The Dematerialized account holder holds an account with the DP, not the issuer. These accounts can be held either by individuals or companies. The ownership of securities in such accounts is evidenced only by book entries and not physical certificates.
The mode of payment depends on the type of shares or mutual funds you own. You can use the physical share certificate for buying/selling if you have physical certificates. In the case of Dematerialized shares, you can open Demat account and can do it online. Once you buy a product, transfer the ownership of shares to yourself in a Demat account to avoid paying tax at every transaction you make.
Another source of confusion is the difference between the stock market and the stock exchange. Many consider two different entities, but they are the same thing. The stock market is where traders buy/sell equities, whereas the stock exchange is the platform where they carry out transactions and trade securities in India.
What are Myths and Facts about Demat Accounts?
There are many myths and rumors about a Demat account. Here are some myths and facts:
Myth 1: Demat account is a safe place to keep your investments.
Fact 1: Demat account is kept by securities depositories, custodians, or banks that accept your physical certificate for safe custody. It is not a bank account and therefore cannot be used as such. There have been instances where the Demat accounts have been hacked and money transferred. So it is advisable to keep only cash in your Demat account that you feel comfortable losing completely.
Myth 2: All my shares are in my name, but I do not know where they are.
Fact 2: Not all your shares will be in your name. Some of them will be held by the Depository Participant (DP), who owns your physical shares on your behalf. If you have the shares through a broker, they will hold them on your behalf in their DP's Demat account. If you bought the shares directly from a company like HDFC Bank, SBI, etc., those shares would be in the DP's Demat account opening, but the Dematerialized certificates will remain with those companies.
Myth 3: Demat account is mandatory for investment in shares.
Fact 3: Demat account is not required to invest in shares. However, you need a Demat account to hold your shares if you buy them through the stock exchange. You can also hold shares through depository receipts and physical certificates.
Myth 4: A Demat account is necessary to use online trading.
Fact 4: You can trade without a Demat account. However, holding shares bought online or through a mutual fund platform is necessary. Also, you have to have a Demat account to pledge your shares or collateralize them to avail of any loan product offered by the bank.
You can use an Individual Retirement Account (IRA) for pledging your shares held in Demat form. It will act as a Demat account and can be pledged with banks and financial institutions as security against any loan amount sought by the investor. To open an IRA, you need a bank account, and the minimum amount to be deposited in the said bank account should be no less than Rs 50,000/-
Myth 5: A Demat account is a banking facility.
Fact 5: A Demat account does not have banking features like a checkbook or ATM card. It simply acts as a repository for securities, and a holder of your securities cannot withdraw money from their Demat account. The only way to access funds from a Demat account is by selling shares from this account.
Myth 6: Demat account is for only those who invest heavily in stocks.
Fact 6: Small investors will have to segregate their holdings for easy transfer/trading. People who invest significant amounts in stocks need this facility to segregate their holdings for easy transfer/trading. They also need a Demat account to hold shares of companies that do not offer physical certificates (such as mutual funds).
Myth 7: Demat is complex, challenging, time-consuming, and not for small investors.
Fact 7: However one chooses to purchase, one must get familiar with all aspects of investments before jumping into them. Dematerialization makes buying and selling easier, quicker, and cheaper than in the past, thus increasing the scope of investments available to all investors, including small ones.
Myth 8: You will get interested in money deposited in a Demat account.
Fact 8: This is another myth that prevails among people. If they keep their money with banks, they will get interested in it. But this is not true as there is no such rule for getting interested in your money kept in Demat accounts and banks provide no such service either.
Wrapping Up
With a lot of misinformation online, the myths and facts mentioned above adequately cleared up what a Demat account is and how it works. Be sure to consult a broker or financial advisor if you have any questions to open up your trading account with confidence.