Why you need a demat account to invest in shares
The share market is a great place to invest, provided you have the right tools. One such tool is the demat account. As per the guidelines issued by the Securities and Exchange Board of India (SEBI), a demat account is mandatory for investing in shares on the stock exchange. If you are considering whether to open demat account to start investing in shares, here’s what you need to know.
Demat account basics
To be an investor or trader in the share market, you must fulfil certain prerequisites. A trading account will enable you to buy and sell shares on the stock exchange. But all share market transactions now happen digitally. Where are you going to keep the security certificates? In a demat account, of course.
A demat account is essentially a place to store your digital shareholdings. It is similar to a savings bank account. Only, instead of money, you store all your share certificates in the demat account.
Reasons to open demat account
As mentioned, the SEBI ruling makes it compulsory for share market investors to possess a demat account. But there are also some advantages to holding such an account.
Before the dematerialisation of share market transactions, people traded physical share certificates. This had a disadvantage—you had to be physically present when the certificates were being transferred. Now, thanks to the demat account, all share transfers take place electronically. And since there are no physical certificates, you need not worry about how and where to store them, and the risk of misplacing the documents is minimised. Your demat account serves as a centralised storage area for all your demat asset holdings. To monitor your entire share portfolio, all you have to do is log in.
Physical share certificates could be lost, damaged, or stolen. You could also receive fake securities, and there was always the chance that shares you had bought would not be delivered to you. These risks are minimised when the certificates are held in digital form. Besides, a demat account comes with extra layers of security. Regulations and statutory compliances have made things even safer. Besides, key details get entered automatically when making a transaction, which reduces the incidence of manual errors.
Costs associated with the pre-demat era, such as stamp duty and handling costs, have been eliminated. And you are no longer obliged to buy shares in large lots. You can even purchase a single share if you wish to, which can bring down your capital requirements. Besides, since transactions and transfers happen online, you can invest from just about anywhere, provided you have access to the broker’s investment platforms.
Now that you know how essential a demat account is for investing in shares, shop around for a suitable product. To open a demat account, simply choose a depository participant (DP), fill in their account opening form, and submit your documents. You will even find bundled products like the 3-in-1 account from Kotak Securities, which combines a savings bank account, a demat account, and a trading account in a single offering. Once you find the right product and complete the formalities, you are ready to start investing in the share market.