A demat account allows investors to hold financial securities like stocks, bonds, mutual funds in a dematerialized or electronic format. Opening a demat account has several benefits for investors in India. In this article, we will discuss some key reasons why opening a demat account with the best demat account providers makes sense for investors.
Convenience of paperless trading
One of the main advantages of a demat account is the convenience it provides for paperless trading. Earlier, investors had to deal with physical share certificates which involved a lot of paperwork for transactions like selling, transferring or pledging shares. With a demat account, all holdings are in an electronic format and transactions can be done online through the depository participant in a few clicks. This saves time and effort compared to physical documentation. Investors can buy and sell securities from the comfort of their home using online trading platforms linked to their demat account.
Lower transaction costs
Physical share certificates involved stamp duty, registration charges and other costs during transactions like transfers. With demat holdings, such costs are avoided since transactions are done electronically. Brokerage charges for online trading through demat accounts are also generally lower than physical share trading. Some brokerages even offer discounted brokerage or zero brokerage on certain trades for demat account holders to encourage paperless trading. This helps investors save on transaction costs.
Easy to monitor portfolio
Keeping track of physical share certificates scattered across different companies can be difficult. With a demat account, investors get a consolidated statement showing the entire portfolio in one place online. Through the depository participant website or mobile app, investors can easily monitor their holdings, latest market values, corporate actions like dividends, bonus issues, etc. from anywhere. This provides transparency and ease of tracking investments.
Safety and security of holdings
Physical share certificates carried the risk of being lost, damaged or stolen. With demat holdings, investors do not have to worry about the safety of paper documents. The securities are held electronically in the depository system. In case of loss of login details, the demat account can be blocked instantly and reopened after due verification process without any risk to the holdings. Investors also get insurance cover for demat holdings up to a certain value in case of events like theft or fraud. This provides better safety and security compared to physical documents.
Eligible for IPO applications
To participate in initial public offerings (IPO) of companies, it is now mandatory to have an active demat account. Without a demat account, investors cannot apply for shares in primary markets. Given the attractive listing gains seen in many IPOs in India, having a demat account opens the door for investors to participate and benefit from primary share issuances.
Easy to inherit and gift shares
Transferring ownership of physical shares to legal heirs or gifting them involved cumbersome paperwork. With demat holdings, shares can be easily transferred to a beneficiary through nomination in case of death of the account holder. Investors can also gift shares to relatives and friends in a few simple steps from the demat account. This brings convenience during inheritance and gifting of shares.
Benefits of corporate actions
Holding shares in demat form ensures that investors do not miss out on any corporate actions like rights issues, bonus issues, stock splits etc. announced by companies. Through their depository participants, investors get credit automatically for all such corporate benefits in a seamless manner. With physical shares, there was a risk of missing corporate mailers and losing out on such value-adding actions. Demat ensures timely action and value addition from company announcements.
Access to IPO financing
Some stock brokers in India provide a convenient facility called IPO financing to demat account holders. Through this facility, investors can apply for shares in initial public offerings (IPOs) without having to use their own money upfront. Brokers leverage the existing investment value held in the investor’s demat account. The shares applied for in the IPO are blocked in the demat account as a collateral against the amount financed by the broker. Investors can use this opportunity to participate in more IPOs than they could otherwise afford with their own funds. After the shares get listed, investors can sell and repay the financing amount to the broker.
Ease of portfolio transfers
Holding investments in a demat account allows investors the flexibility to easily change their broker without much hassle. Earlier, if one wanted to shift their investments from one broker to another, it involved a lot of paperwork. Physical share certificates had to be withdrawn from the old broker and deposited with the new one. This process took a lot of time. However, with investments held electronically in demat, an investor can simply give online instructions to shift the entire portfolio from one broker to another. With a few clicks, all holdings get transferred. This makes changing brokers quite simple and quick. It allows investors to shift to a broker providing better customer service, trading platforms, brokerage costs or any other feature without much difficulty.
Tax tracking convenience
For any investor, keeping track of taxes on their investments is an important requirement. In the past, with physical share certificates, it was very difficult for investors to maintain records of numerous transactions carried out over long periods of time. This included tracking the purchase price of each share, sale price and period of holding. Calculating capital gains was a tedious and error-prone process. However, with a demat account, the entire transaction history is maintained electronically by the depository participant in a centralized manner. Investors can easily view all their purchase and sale transactions online. Brokers also provide periodic capital gains statements to demat customers based on this transaction data.
A demat account for stock trading provides numerous benefits like paperless and low-cost transactions, security of holdings, ease of corporate actions, portfolio monitoring and taxes, access to IPOs and more. Given these advantages especially in India’s growing digital economy, opening a demat account makes complete sense for investors of all sizes to participate and benefit maximally from stock market investments. With online trading now popular and brokerage costs low, there are no significant reasons for investors to avoid opening a demat account.