The first step to trade in equities or the stock market is to open a Demat account as it is similar to a driving license just like an individual can not drive a car without having a driving license in the same way an individual cannot trade in stock markets without having a Demat account on his or her name and therefore before opening an account you should know some of the advantages and disadvantages of a Demat account. Let’s look at some of them –
Demat Account Advantages
Electronic Form
The biggest benefit is that you do not need to hold securities in physical form rather they are kept in electronic form and therefore the risks of losing shares due to theft, fire, flood, and earthquake are eliminated which used to happen in the past when people kept physical shares with them.
Instant Transfer
One can have the instant transfer of stocks from one account to another and therefore the whole process of buying and selling becomes fast which in turn increases the efficiency and effectiveness of the stock market as a whole apart from providing instant liquidity to the holder of the stock whenever he or she is in need of funds.
Stamp Duty
Since they are held in electronic form there is less stamp duty on the transfer of securities as compared to the transfer of shares in physical form which reduces the transaction costs associated with buying and selling of shares.
Multiple Use
Demat account is not only for equity shares but you can keep mutual funds, gold exchange-traded funds, preference shares in it which makes it easier for individuals to keep track of their investments as they do not have to check several accounts, they just have to check their Demat account for knowing about their portfolio.
Small Trades
An individual having a Demat account can even trade for 1 share also which was not the case when you hold them in paper form as the paper form has fixed denominations which can be in tens or hundereds.
Demat Account Disadvantages
Internet and Computer Requirement
The biggest limitation is that in order to have a Demat account one needs to be internet savvy and therefore people who are not that literate with the internet will find it hard to operate their Demat account and therefore they tell their brokers or sub-brokers to transact on behalf of them which sometimes lead to fraud and mismanagement of funds by the sub-brokers.
Test of Patience
Another limitation is that since stocks are dematerialized individuals tend to keep looking at the stock price more often than they would have if stocks were in paper form and therefore they end up doing trading instead of investment, however, this limitation is not of Demat account but of individuals as they are not patient enough still many people blame it on Demat account when they are asked why they are in a hurry to sell their shares.
Annual Maintenance Charges
In the case of a Demat account, the account holder will have to pay annual maintenance charges for keeping the Demat account which can be a deterrent if you are not an active trader as people who trade in 2 or 3 years will not prefer to give annual maintenance charges continuously for 3 years.
As one can see from the pros and cons of Demat account that although it has its cons, however in today’s world where everything runs on the technology you cannot afford to have physical shares and that is the reason why if you are interested in trading and investing in stock markets than you should open a Demat account right away.