Why Demat Account is Must for Today's Investors
Banks in India are making sure to provide essential services to every corner of the country. Seeing this and the fact that the Indian market is an open opportunity for earning money for every young professional, student, or experienced businessperson, banks brought a Demat account under the purview of essential banking services over time.
What is a Demat Account?
A Dematerialized or Demat account allows you to manage and hold your securities and shares electronically. It is the primary requirement for trading in the market. A Demat account holds various securities like mutual funds, government securities, ETFs, and equity shares.
Additional Read: Best Demat Account for Beginners in India
The Necessity of having Demat Account for Investors
As time moved forward, the shares have changed from physical certificates to electronic figures reflected in Demat accounts. Physical share and security certificates are no longer in practice. This made the Demat account and Trading account a compulsion for investors to enter securities trading. Without a Demat account, you cannot store your shares and other securities. Hence, SEBI has made it compulsory for all investors to begin their investment journey directly in secondary markets or IPOs only when they have a Demat account.
Additional Read: Can I trade without a Demat Account?
Importance of Demat account
Shares in the Demat account stay safe and can be transferred effortlessly when required. Online trading would facilitate you to trade directly in the stock market and actively participate in exchanges via online platforms. Before the introduction of Demat accounts, the investors needed a lot of time and effort in investing in the share market. The process went through hiring and consulting a broker to spot the best deals, complete all purchase-related formalities manually, and then waiting for delivery of physical shares certificate. In comparison, a Demat account is a hassle-free option proven by the figures that say that nearly 40.8 million Demat accounts were opened in India during 2019-20.
Additional Read: Documents Required To Open A Demat Account
Opening Demat accounts help in removing trade barriers with ease of accessibility and quick share transfers. You are not mandated to rely on brokers or sub-brokers for carrying out the trades. All that is needed now is to consult a well-reputed Depository Participant and open a Demat account. The shares held in the Demat account can be pledged as collateral for a personal loan from a bank. The best part here is that there is no need to hand over the share certificates to the bank physically. Most banks offer 1 lakh to 25 lakhs as a loan amount against the shares in the Demat account.
Owning a Demat account saves on stamp duty on the agreements between Depository Participant and you. This, in turn, saves costs on dealings and registration. There are no geographical or security barriers in operating through a Demat account. The account comes with multiple accessing options that can be operated electronically. This makes it possible to sell, buy and monitor shares from anywhere. Dealing in odd lots is possible with the introduction of the Demat account. Earlier it was impossible to deal with a single security or odd lots. The importance of a Demat account expands more than what looks like an appropriate emphasis when discussing markets today.
Additional Read: Features and benefits of a Demat Account
Demat account is fuss-free and a must for entering better financial planning, answering the question asking for the relevance and importance of the Demat account. And opening a Demat account is a simplified process too. Anyone can have a Demat account – a minor or a major. You can open your account online or offline, as per your preference. Broadly, it entails selecting an ideal broker for you, filling up an account opening form and submitting it along with a mandatory set of KYC documents, and lastly, completing the verification process. Once this is done, you are set to swim in an ocean of opportunities.
Additional Read: Who can open a Demat Account? Know the Eligibility Criteria
Also Read: How to Choose the Best Broker?
Also Read: How to open Demat and Trading Accounts?
1. Why is it important to have a Demat account?
A Demat account safely holds your securities and shares in electronic form. The importance of a Demat account can be explained with the following points,
- You can transfer your shares and securities effortlessly from one account to another using a Demat account.
- It gives you the liberty to not rely on brokers or sub-brokers for carrying out the trades. Being a digital account, a Demat account allows you to buy, sell, and track your shares from literally anywhere.
- Moreover, the shares held in the Demat account can also be pledged as collateral for a personal loan from a bank.
- Dealing in odd lots is possible due to Demat accounts.
- It also saves on stamp duty on the agreements between Depository Participant and you, thereby saving cost on dealings and registration.
2. Is a Demat account required for investing?
Yes, a Demat account is required for directly investing in shares and other financial market securities.
A Demat account safely holds your securities and shares in electronic form. When you buy any shares or securities through an IPO or from secondary markets for an investment, they are stored in your Demat account. However, you must know that you cannot trade with a Demat account alone – you require a Trading account to execute the buying and selling transactions.
Having said this, you do not mandatorily require a Demat account for investing in every asset class. For instance, you can invest in Mutual Funds even without a Demat account.
Additional Read: How to Invest in Mutual Funds without a Demat Account?
Additional Read: Basics of a Trading Account That You Must Know
3. What happens if I don't use my Demat account?
A Demat account not used for long is called an inactive account. Each broker may have a different definition of a dormant account. Now, Demat accounts come with an annual maintenance cost (AMC), whether you use it or not. This means even if you do not use your Demat account, you will have to pay the regular maintenance fees. Most brokers directly deduct these fees from the linked bank account itself. But, if your bank account or linked Trading account does not have sufficient funds, and if you fail to pay these fees on time, you will be charged additional interest too. You may also receive repeated reminders on email, SMS, and phone calls to clear these accumulated costs, or your account will be deemed dormant.
Furthermore, as your PAN card is linked to your Demat account, an unpaid Demat account may translate into rating agencies assigning a low credit rating to you. In other words, you may not be able to take loans from banks and other financial institutions. And even if you take a loan, you may be charged hefty interests for it.
Once your account is said to be dormant, you will not be able to execute any transaction from your Demat account till it reactivates. And you can reactivate your account by paying your pending account dues and a reactivation fee. The reactivation fee may also differ from broker to broker.
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 the 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 purposes.