Why do I need a demat account for stock trading? MintGenie explains

Markets attract millions of investors worldwide, offering avenues for investment in stocks, commodities, and bonds. However, to engage in any trading activity in these markets, including commodities and bonds, it's essential to have a demat or dematerialised account.

A Demat account serves as a secure storage facility for all your shares and securities. Unlike the traditional method of holding physical share certificates, which posed risks such as theft, demat accounts store securities electronically, mitigating such concerns.

In India, two primary depositories facilitate the opening of demat accounts: the National Securities Depository Limited (NSDL) and the Central Depository Services Limited (CDSL). These depositories play a crucial role in maintaining and managing the electronic records of securities held in demat accounts.

Read here: What is a demat account and how does it work?

When you want to trade in shares or hold them on a delivery basis, you need to have a demat account for online stock trading. But why should you open a demat account for trading? Let's take a look at its key benefits.

No Document Loss: Prior to the advent of demat accounts, shares were vulnerable to tampering, theft, and forgery due to their physical paper form. The process of transferring shares involved cumbersome paperwork, prone to errors and delays. Demat accounts provide a secure electronic storage solution, eliminating these risks and simplifying transfer processes.

Cost-Effective: Traditional physical trading incurred additional costs such as handling fees and stamp duties, often unpredictable and burdensome. Demat accounts streamline expenses, with transparent brokerage charges being the primary cost. Opting for discount brokers further enhances cost-effectiveness, making demat accounts an attractive choice for traders seeking savings.

Read here: Affluent India is fuelling the equities surge. But that story has gaps

Time-Saving: Demat accounts enable swift buying and selling of shares, thereby enhancing share liquidity. Transfer processes have been significantly streamlined, resulting in considerable time savings for investors.

Easy Tracking: Demat accounts eliminate the need for manual record-keeping and tracking of physical documents. All investment records are securely stored on a digital server, simplifying tracking and management for investors.

Corporate Gains: Demat accounts automatically update corporate actions such as bonus issues, stock splits, and rights shares. This ensures that investors receive refunds, interest, or dividends in a timely manner, enhancing the overall convenience of online trading.

Diverse Investment Storage: Apart from shares, demat accounts securely hold a wide range of investments including bonds, mutual funds, ETFs, and government securities. This comprehensive storage solution offers investors greater diversification opportunities and portfolio management flexibility. You can also apply for IPOs and FPO through your demat account.

Read here: How to start investing in the stock market — A beginner’s guide

Ease of Access: Demat account holders enjoy the convenience of accessing their accounts anytime and anywhere using smartphones or laptops. This accessibility enhances the overall flexibility in managing investments and monitoring portfolio performance.

FAQs

What is the minimum age to open a demat account?

Contrary to popular belief, you do not need to be 18 years old to open a demat account. There is no minimum age to invest in the stock market so adults, as well as minors, can have a demat account. However, if you are under 18 years of age, your parent or guardian can open a demat account in your name. Also, you will not be in charge of your demat account until you are 18 if your account has been opened before that age. Your parents or guardian will manage the account. After you are 18, the depository will send an advisory to obtain documents to transfer your demat account to you officially.

What is a depository?

A depository can be compared to a bank. A depository holds securities (like shares, debentures, bonds, government securities, units, etc.) of investors in electronic form. Besides holding securities, a depository also provides services related to transactions in securities.

Read here: Over two-thirds of demat accounts are without nominations: Sebi

Can I purchase government securities directly in demat form?

Indeed, the market for government securities such as bonds and treasury bills (T-Bills) has become readily accessible to retail investors. The Reserve Bank of India (RBI) reserves a portion of new issues specifically for retail investors. You can invest in government securities (G-Sec) either by participating in auctions of new securities or by purchasing already issued securities in the secondary market. To engage in either method, you must approach any authorised bank, primary dealer, or stockbroker, providing your demat account details (DP ID and Client ID).

How will I know that my DP has updated my account after each transaction?

You will get an account statement showing the transactions and balances periodically to help you monitor the happenings in your account. You may also monitor the same by using facilities like SMS alerts, IDeAS, and Mobile Apps.

What will happen if my DP goes bankrupt or stops operation?

In the rare event of your DP going bankrupt or closing its operations, the interests of the demat account holders are fully protected. In such a situation, you would be given the option to transfer your balances to any other DP of your choice or rematerialise the same.