Pros and Cons of Opening a Demat Account
The shift to an electronic trading system has completely changed the overview of the Indian stock market. With Demat Accounts becoming compulsory, several formerly associated issues with holding physical shares, such as loss, stamp duty costs, theft, forgery, misplacement, and other negative aspects have either been completely eradicated or minimised substantially. So, while it is compulsory to have a Demat Account to trade in the stock market, let's view some of the pros and cons of having Demat account.
- Quicker settlements
Previously, with paper share certificates, trade settlements would take approximately 14 days. Today with your Demat Account, the settlement cycle has come down to two working days, thus freeing a significant amount of time, effort and energy.
- Reduced errors
At the time of manual paperwork, physical and offline settlements were often prone to mistakes. Past instances of erroneous trading caused several investors and traders to lose large sums of money. With the onset of the Demat Account, manual errors have been wiped out.
- Easy liquidity
With your Demat Account, you can easily facilitate asset liquidation. In the past, doing so was a cumbersome and challenging task when assets were held in their physical form. Today, you can buy and sell securities and save them in your Demat Account, take a loan against your shares or mutual funds, among others, when you hold your financial assets in their dematerialized format.
- Odd lots eliminated
One of the most prominent advantages of holding a Demat Account is the elimination of the odd-lots issue. Previously, you could only sell physical shares in lots. Today, if you choose to buy and sell even a single share, you can do so with your Demat Account.
- Single repository for all assets
Your Demat Account not only stores your stocks but can also hold all other financial securities in their dematerialized form, such as Exchange-Traded Funds (ETFs), Unit-Linked Insurance Policies (ULIPs), bonds, debentures, mutual funds, Sovereign Gold Bonds (SGBs) and more. Having all assets under one roof can allow you to monitor and track your investments quickly. Besides, it is also helpful when filing your income tax as you can view all your assets in one place.
While the Demat account has transformed the way investors and traders transact in securities, it does have a couple of pitfalls. Let's look at the few disadvantages of Demat Accounts.
Additional Read: Why you need economic moat in your portfolio
- High costs
Some investors view the expenses associated with their Demat Account as a disadvantage. However, to maintain your Demat account, there are specific fees that can help manage its smooth operations. These costs include transaction expenses, custodian costs, annual maintenance charges and account opening fees.
- Risk of churning portfolio often
Since you can easily access your Demat account online and on any Internet device, you may be tempted to trade frequently. The ease with which you can trade from any place may result in continuous buying and selling that could affect your wealth creation goals, especially if you have financial objectives to meet. Besides, you may be lured to indulge in short-term trading rather than focusing on long-term investing.
- Requires tech skills
Having a Demat account may not require you to be a tech expert. However, you would need to know how to operate the account, monitor, transact, track among other skills. And for that you would have to know and learn some tech skills to a certain extent.
Additional Read: Dos and Don'ts for a Demat Account
While there are a few disadvantages to having a Demat account, they can easily be conquered through research, due diligence and financial awareness. The advantages of holding a Demat Account far outweigh those of the few cons.
So, if you are eager to trade in the stock market, it can help to know that having a Demat Account is a prerequisite to transacting directly in the stock market. Opening a Demat Account with a well-established, full-service stockbroker can give you the necessary tools and information you need to trade safely and securely in the stock market.
1. Are there any disadvantages of opening a Demat Account?
While Demat Accounts have many advantages for those who want to trade in the stock market, it has certain pitfalls. One of the biggest con of a Demat Account is the charges associated with it. You have to pay an annual maintenance fee, transaction fees and custodian charges to use the account. Also, having and operating a Demat Account requires you to be tech-savvy. You may also be tempted to transact frequently, which could affect your portfolio composition and financial goals in the long term.
2. Do we need bank account for Demat Account?
Yes, every Demat Account needs to be linked with a bank account. You also need a Trading Account to operate a Demat Account.
3. Is a Demat account risky?
While Demat Accounts are considered relatively safe because of all the security provided by regulatory authorities, they may be prone to certain risks such as fraud or unauthorized transactions. However, with the right precautions in place, these can be avoided. For instance, don’t share your Demat Account details with others and freeze your account if you are not going to use it for some time.
Disclaimer: ICICI Securities Ltd.( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Centre, H. T. Parekh Marg, Churchgate, Mumbai - 400020, India, Tel No : 022 - 2288 2460, 022 - 2288 2470. The contents herein above shall not be considered as an invitation or persuasion to trade or invest. Investments in securities market are subject to market risks, read all the related documents carefully before investing. I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. The contents are solely for informational and educational purpose.