The word ‘Demat account’ is a staple in the investor’s vocabulary. It refers to a type of account in which all the certificates of an investor’s securities are held in the electronic or dematerialised format. Prior to the use of Demat accounts, all these certificates were held in the physical form by investors. In India, the two major depositories the National Securities Depository Limited (NSDL) and the Central Depository Services Limited (CDSL) control all Demat accounts.
With the pervasiveness of the internet, the use and importance of Demat accounts has been understood. Very few investors today choose to keep their share certificates in the physical format as all trading occurs through the online channels on which Demat accounts operate. Here’s a look at the reasons an investor should open a Demat account.
Demat account is mandatory to trade on stock exchanges
The Securities and Exchange Board of India (SEBI) has made it compulsory to hold a Demat account if you wish to trade on the stock exchanges. With the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) under the purview of this mandate, all investors must open a Demat account with a broker before they can start trading. These dematerialised share certificates help buy and sell easily on the stock exchange.
Ease of storage
With Demat accounts, investors can easily store their share certificates. Before Demat accounts became the norm, only brokers were allowed to participate on the stock exchanges. The certificates issued would then be relayed to the investor, who would in turn have to spend money and effort on storing them safely. With electronic certificates held in Demat accounts, investors can directly participate in the stock market without worrying about their storage.
Save money and time
Investing in the stock market was an expensive and time-consuming affair before the advent of Demat accounts. An average investor would find the right broker through whom they would find the deal best suited to them, buy the shares, and then wait for the certificates to be delivered. The brokerage fee and other logistical expenses would eat into any future profits they may make. Now, most brokerages offer free Demat account opening. A Demat account presents a one-stop solution to all these challenges. The ability to carry out transactions accurately and speedily online also helps investors to circumvent the barriers posed by the manual process.
Get loans easily
Investors can raise loans with their shareholding in the Demat account as collateral. The process is very smooth and easy as the bank does not require physical certificates of your shareholding. You can simply submit a statement of your Demat account.
In FY2021, a record 14.2 million were opened in India. This is clearly indicative of the willingness of people to invest in the stock market, and their confidence in the importance of Demat accounts. With such a democratised stock market participation, it is important that each investor has the freedom to trade freely and without hurdles. The extensive use of Demat accounts ensures just that.
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