What Are the Disadvantages of Having a Demat account?
Shares of a company were stored in a physical form before dematerialisation, resulting in misplacing and stealing of certificates. During this time, it was a challenging task for shareholders to invest after overcoming all such issues. However, after the dematerialisation of shares, these risks have been eliminated with the introduction of the Demat account.
Being an electronic form of storing shares, Demat accounts turned out to be very efficient. However, a Demat account also has certain disadvantages.
Let us know more about the Demat account and its disadvantages!
What Is a Demat Account?
A Demat account is an electronic account for holding shares and securities in dematerialised format. It holds all the investments an individual makes in one place and was first introduced by NSE in 1996. Some of these assets are shares, bonds, mutual funds, government securities, and exchange-traded funds.
The digitisation process of the Indian stock trading market was enabled by the introduction of Demat and is controlled by SEBI. It facilitates an easy trading system for its users, as during online trading, shares are held in this account. In addition, it reduces risks of theft, damage, and fraud by storing securities electronically.
What Are the Main Disadvantages of Having a Demat Account?
- Annual Charges
While opening a Demat account, you should consider annual maintenance charges/fees that the financial institution might charge. This charge varies from one financial institution to another and in some places it might be free for life. Moreover, there are no discounts in charges if you hold a very minimal number of shares and you still have to pay the full fee.
- Dishonest Brokers
Many investors indulge their stockbrokers to carry out most of their trade structures, becoming a counterparty to a client’s trade. However, this can lead to numerous fraudulent activities and an investor must be aware of this before handling responsibilities to their brokers. Hence, it is advisable to find a brokerage firm that enjoys a Government reputation with complete transparency.
- Stockbrokers Supervision
As we already know, there are high chances of experiencing dishonesty from brokers, resulting in regular supervision for checking any presence of incorrect transactions. Mostly every stockbroker has the power of running operations from their Demat account in the stock market. Hence, as an investor, it is your duty to constantly supervise your stockbroker’s actions to avoid forgery and loss of money.
- Technology Literate
While trading through a Demat account it is very necessary for you as an investor to be technologically smart and literate. Without proper knowledge and experience in the basics of computers, it will be very difficult to operate a Demat account. Although you can use the call and trade facility, it is time-consuming and might lead to a loss on potential profit-making opportunities.
- High Frequency of Trading Shares
With the formation of a Demat account, share trading operations in the market have become simpler and faster and can be done with a single click. This results in a tendency to trade more often and the general habit of long-term trading vanishes. Hence, this situation often leads to losses in the stock market, discouraging you as an investor. However, to avoid such cases, it is advised to be patient and wait before trading again in the share market.
What Are the Advantages of Having a Demat Account?
The advantages of having a Demat account are as follows:
- Swift settlements with the seamless and fast transfer of shares
- Digitally secure way of storing shares and securities
- Eliminates theft, loss, damage, and forgery of security certificates
- Budget-friendly and easily available due to the elimination of paperwork
- Increased share trading volume and market participation
- Easy access to account from multiple touch points like mobile, tablet, PC, laptop etc
- Builds trust and increases investor confidence with transparency
Although Demat accounts have a fair range of disadvantages, the advantages or benefits it provides to the users outweigh the former considerably. Since a Demat account is a basic requirement to trade in stocks and securities, it is recommended to use it with proper market research and knowledge of trading. In addition, if you maintain some prescribed norms, you can earn huge returns from this.
Frequently Asked Questions
How does a Demat account work?
The working of a Demat account is similar to a savings bank account, as you can store securities of a depository participant in it like cash in a savings account. Shares get credited to your Demat account when you purchase them and they get debited when you sell them. However, to carry out this transaction smoothly, it is important to link it to your bank and trading account.
What are the documents required for opening a Demat account?
The main documents required for opening a Demat account include proof of identity (with a photograph), address, income and bank account. For this, you need to furnish documents like Aadhaar card, PAN card, voter ID card, driving licence, passport, telephone bills, bank passbook, payslips, and many more.
Is it possible to open more than one online Demat account?
Yes, it is possible for anyone to open more than one online Demat account with various brokers, as the number of accounts you can have at one time is unrestricted. Multiple Demat accounts can also allow you to hold securities in separate accounts for the diversification of assets. However, it is also important to know the pros and cons of owning more than one Demat account and gain proper knowledge before doing so.
Who are the participants of a Demat account?
A Demat account requires the participation of mainly 4 agents – investors, depository, depository participants and the issuing company. The unavailability or negligence of any of these 4 participants can affect the smooth function and working of a Demat account, as they are interrelated.