Similar to the concept of internet banking, the process of dematerialisation has made stock trading activities easier and simpler than ever before!
Back in the 90s, stocks and investment securities were available in a physical format for trading and maintaining them was a challenging task for investors. There was also a risk of these securities getting stolen, forged or destroyed. However, with the advent of dematerialisation, gone are the days when you had to safeguard these securities from such unfortunate events.
A demat account is a great alternative for investors to hold their investment securities such as stocks, mutual funds, bonds, etc. in an electronic form. So, if you want to know how to open demat account, then approach a good depository participant (DP) today and let them assist you!
When it comes to opening a demat account with a bank, you may face some hurdles along the way. Let’s take a look at some of them.
The Need To Be Internet Savvy
The most prominent downside of having a demat account with a bank is that an investor needs to be internet savvy. People with demat accounts are likely to be subjected to internet scams if they are not technologically informed enough to grasp the financial market developments. Due to their substandard technological knowledge, most investors have to depend on banks that may oppose their orders. Therefore, investors who are not acquainted with the Internet ask their banks to transact on behalf of them which may lead to mismanagement or fraud of funds by the banks.
The 3-in1 Demat Account
If you’re a new investor looking to invest in stocks, then it is best to open a demat account and a trading account to start investing. A demat account is mandatory as it will keep your shares in dematerialised form. A trading account is mainly used for placing buy and sell orders and a savings bank account is used to credit the profit made from the buying and sell process. The 3-in-1 account is a combination of demat, trading, and savings account which many banks now offer.
This type of account may look convenient to handle as it tracks all your trading processes and runs them simultaneously, but it does come with some major drawbacks. First, the main disadvantage of having a 3-in-1 account is that it is generally available at a higher cost than a regular demat account with a brokerage firm which is low in cost. Moreover, some banks even have a policy that states an investor must maintain a minimum balance in their savings account, which might not be possible for small investors. Moreover, it is not an enormous benefit as most brokerage firms allow investors to trade capital from their bank account to their trading account smoothly.
Account Maintenance Charges
A demat account is not free of cost as the bank would always charge maintenance fees on a yearly basis. Moreover, demat accounts acquire annual expenses and maintenance charges even when an investor doesn’t utilise them for trade. Therefore, it is best to close all the inactive and zero balance demat accounts to save from paying additional charges. If an investor has demat accounts with leftover balances, then they can all be merged into one demat account and the other demat accounts can be closed with the bank.
With technological growth, dematerialisation of shares and stock trading has become simple. This can often make an investor check the stock prices, which wasn’t the case when the shares were in physical form. As a result of this, an investor tends to forget their long-term goals and only focus on the present trading process. Also, It is compulsory for the investor to keep a close watch on the process followed by the bank in dematerialised securities so as to avoid any mishap.
Agreements Are Entered At Various Levels Of Dematerialization
Some banks may include additional contracts at different levels in order to complete the process of dematerialisation. This may often prove to be a complex process for an individual and they may lose interest in trading. Moreover, at the time of opening a demat account, there are various regulatory frameworks that have to be followed while dealing with a bank. From filling the required forms to gathering all the necessary documents required to open a demat account, the investor has to do it all. Additionally, an investor needs to follow various regulatory frameworks such as the Depositories Act, Regulations and the various By-Laws of various depositories.
The aforementioned disadvantages shouldn’t deter an investor to open a demat account with a brokerage firm. An investor, however, should be careful while managing their demat account. Your expertise in the financial market and trading skills are the keys to converting these disadvantages into advantages! With the right DP, you can dive into the world of trading and understand the intricacies of how a demat accounts operate and is also profitable!