Importance Of Demat Account

These days every other individual is showing interest in share market investment and thus opening a demat account with one or the other known stockbroker. But wait! do you have an idea of the importance of demat account in online trading.

If not! then here is the complete information depicting the significance and need of demat account in India.

In a simple sense, a demat account is just like a savings account that you have with your bank. A savings account is where you keep your hard-earned money and a demat account is where you keep your stocks. 

Let’s learn more about the importance of demat account in detail.

Why Demat Account is Required?

Before 1996, the investors get the equity shares in the physical form. Now during that time, the settlement day was of about 14 days, further, there were chances of fraudulent activities, theft, etc that generally leads to the losses of investors.

With the Depository Act in 1996, the demat account was made mandatory. Along with this, NSDL came into existence in the same year. However, you cannot open the NSDL demat account directly but the depository performed the role of operating and maintaining the demat account.

Here Demat account generally means holding the shares in an electronic format and the process involved in converting physical shares into electronic form is called Dematerialization.

This eventually reduces the chances of frauds and other losses that generally investors faced with the physical shares.

Also, demat account cut losses and makes it easier for investors to track their investment. Further demat account rules make it further easier for the investor to operate and manage their account.

Let’s discuss the importance of demat account in India in detail:

1. To Keep Multiple Securities Under One Roof: You probably have separate investments in different financial products such as Mutual Funds, Equity, and Debt Securities, to name a few. Maintaining them in different places can be a confusing task.

With the help of a demat account, you can easily store them in the same account, which can make things much simpler for you.

And if you want to track any particular investment you have made, you just need to log in to the same single account to get access to it. Simple to manage!

2. To Ensure Safety: Gone are the days when online financial transactions were considered to be risky. In this modern era, numerous security measures are practised for all types of online monetary dealings. This is also true in terms of a demat account.

Due to the various layers of security and regulations associated with such accounts, the importance of demat accounts has gone up amongst investors.

3. To Trade Conveniently: Dealing with physical stocks would mean visiting your broker every time you wished to trade. It would be highly inconvenient for you. Since the advent of electronic forms of stocks, life has become very simple and convenient for investors.

Whenever you wish to trade in the share market, all you need to do is turn to your demat account and go ahead with your trading.

4. Allow Flexibility in Trading: Another great importance of a demat account is the flexibility it offers when it comes to trading. You can easily trade in your demat account from your handheld or your computer.

There is no need for you to sit in front of a computer every time you wished to trade. You may also buy and sell while on the move. In other words, there are so many high-performance mobile trading apps that you can use to place online trades.

5. Can Trade Share in Odd Lots: If you want to transact a single share with either a buy or a sell trade, it was not possible when physical shares were around. However, with dematerialization done, you can place orders even for such odd-lot units for your trades.

6. Relatively Cheaper: One of the top advantages that take the importance of demat account to a different level is that it is economical as well.

There are multiple additional charges levied such as handling charges when shares are to be physically managed by the stockbrokers.

Furthermore, such costs increase with an increase in your holdings, thereby, eating up your profits. With a demat account, it feels lighter to your pocket too.

Although one needs a few documents required for demat account, it is still worth the convenience and benefits it offers you.

Still, there is certain confusion regarding the importance of demat accounts among beginner investors. Let’s resolve it one by one by discussing in detail the significance of a demat account in online share trading.

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Is Demat Account Required for Stock Market?

Demat account as already discussed holds all kinds of securities, bonds, ETFs in an electronic form. In all, it is a gateway to begin your journey in the share market.

Now if you are an equity investor, who plans for the long-term investment or let’s say want to trade in securities by holding them for more than one day, then YES you need a demat account in the share market.

Wondering why only when you have to hold securities for more than one day?

This is because of the settlement time. As per the SEBI guidelines, the settlement cycle is T+2 days which will be T+1 from January 2022 onwards.

Now if you opt for CNC or BTST trade, then the shares are reflected after 2 trading days in your demat account. This makes it important for every equity investor to have a demat account in the share market.

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Is Demat Account Required for Trading?

The stock market is meant both for planning long-term investing and for trading. Now, this trading is of different types depending upon the validity of the order and further on the segment.

For example, on the basis of validity, trading is intraday trading. Further on the basis of holding time, it is swing trading, positional trading, etc.

On the basis of segment, the trading is further divided into two types, Futures, and Option trading.

Here intraday trading is buying and selling of shares within the same trading session and hence shares are neither credited nor debited from your Demat account.

On the other, futures and options come under the derivatives segment where contracts are traded. Here again, no transfer of shares takes place to and from the demat account.

In both the above cases, a demat account is not required. Thus, it is clear that a demat account is required only when you are trading in shares that are meant to be held for more than one day.

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Is Demat Account Required for IPO?

IPO or Initial Public Offerings opens a gateway for the most beginners in the share market. As per the IPO process, you can buy shares of the company in the primary market and can reap the benefit of listing gains.

Here still you are investing in the equity shares of the company, thus it makes it mandatory for you to have a demat account before you apply for IPO of any company.

Once you open a demat account with the renowned stockbroker you can easily apply for the Public Offerings via the ASBA method.

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Is Demat Account Required for Mutual Funds?

Along with many investment options, there are mutual funds, now when investing in mutual funds an investor does not require a demat account. However, it is important to complete the KYC process to initiate investments in mutual funds of different companies.

Other than this, if you are planning to invest in multiple investment segments including stocks, bonds, along with mutual funds, then YES having a Demat account makes total sense.

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Is Demat Account Required for Sovereign Gold Bond?

The last segment where one can invest and gain profit in the share market is the Sovereign Gold Bonds. Now unlike other bonds, these are the gold bonds issued directly by the Reserve Bank of India (RBI) on the behalf of Government of India.

This bond is issued and can be bought on a per-unit basis the price of which is derived from the value of the one gram 999 pure gold.

Here the investor pays the issue price in cash and avails the benefit in cash on maturity.

Now comes the point of whether or not you need a demat account to invest in Sovereign Gold Bonds, so here the answer is NO! however, you are provided with the choice of converting the bond in the dematerialized form in order to provide additional security.

Until the bonds are dematerialized it is held in the RBI books. You can choose the stockbroker with whom you want to open a demat account and further can place a request to convert the Sovereign bond into dematerialized form.

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Conclusion

So here it is clear that demat account is the way for you to enter the share market and to invest in different options.

However, not all trading products require demat account but here one can have a 2 in 1 or 3 in 1 demat account with the stockbroker thus making it easier for them to trade in different segments and products and further store the dematerialized shares in the demat account.

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