The first step to trade in equities or stock market is to open a Demat account and therefore before opening an account you should know the advantages and disadvantages of Demat account. Let’s look at some of them –
- The biggest benefit is that you do not need to hold securities in physical form rather they are kept in electronic form and therefore the risks of losing shares due to theft, fire, flood and earthquake are eliminated.
- One can have instant transfer of stocks from one account to another and therefore the whole process of buying and selling becomes fast which in turn increases the efficiency and effectiveness of stock market as a whole.
- Since they are hold in electronic form there is no stamp duty on transfer of securities which reduces the transaction costs associated with buying and selling of shares.
- Demat account is not only for equity shares but you can keep mutual funds, gold exchange traded fund, preference shares in it which makes it easier for individuals to keep track of their investments as they do not have to check several account, they just have to check their demat account for knowing about their portfolio.
- An individual having demat account can even trade for 1 share also which was not the case when you hold them in paper form.
- The biggest limitation is that in order to have a demat account one needs to be internet savvy and therefore people who are not that literate with internet will find it hard to operate their demat account and therefore they tell their brokers or sub brokers to transact on behalf of them which sometimes lead to fraud and mismanagement of funds by the sub brokers.
- Another limitation is that since stocks are dematerialised individuals tend to keep looking the stock price more often than they would have if stocks were in paper form and therefore they end up doing trading instead of investment, however this limitation is not of demat account but of individuals as they are not patient enough still many people blame it on demat account when they are asked why they are in a hurry to sale shares.