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What Is a Demat Account And Its Importance?

If you are a first-time investor in the stock market, your share broker will ask you to open a demat account. It is mandatory to open a demat account for online trading – buying and selling securities in financial markets. Here is all you need to know what is demat account and how it will benefit you.

Meaning of Demat Account

Demat is the abbreviation of dematerialisation. It is a process of converting physical shares into electronic shares. Hence, a demat account allows stock market investors to hold their securities in a digital format instead of physical certificates. 

Importance of Demat Account

Here are a few reasons why a demat account is important:

1. Hassle-Free 

The physical paperwork of securities is quite cumbersome. It is difficult to keep a track of securities and monitor them. The transfer of shares is also a tedious process and vulnerable to manual delays and errors. A demat account tackles s all these issues and provide a convenient and easy way to hold and manage your securities. These securities are also easily accessible anytime, anywhere at your fingertips on any electronic device such as a computer, laptop, smartphone or tablet, thereby eliminating the need to carry physical certificates or visit the stock market/broker.

2. Safety

There is a high probability of theft, loss, damage, and forgery of physical certificates. Since a demat account holds securities electronically, there are additional layers of statutory and regulatory compliances that make them a much safer alternative to physical shares.

3. Multiple Securities

You can hold shares, mutual funds, bonds, government securities, and Exchange Traded Funds (ETFs) electronically in a single demat account.  Can manage your entire stock market portfolio more effectively & can even participate in upcoming IPOs.

4. Loan Facility

There are times when a financial crisis strikes and you need to avail of a loan against collateral. A demat account allows you to mortgage your securities and raise funds quickly at cost-effective rates. Moreover, you continue to remain the legal holder of the securities until you repay the loan amount with interest in full. So, if a company declares a dividend or issues bonus shares, you are still eligible to receive them.

5. Automatic Credit 

Physical holding usually makes it difficult to claim corporate benefits such as bonus stocks, split shares, interest, dividends and right stocks. They may get lost in transit after the company has mailed them. You need to go through a lengthy documentation process for reissue.

On the contrary, a demat account allows automatic credit of these benefits without you going through any kind of trouble to claim them.

Opening a Demat Account

It is very easy to open a demat account online through the following steps:

  • Fill out a demat account opening form 
  • Enter your personal details
  • Add your PAN and bank details
  • Upload KYC documents for identity and address proof
  • Follow the in-person verification process

After the verification is complete and everything is in order, your demat application will be processed and you will receive your demat account number.

It is advisable to choose a stockbroker who can take you through a quick and paperless process to open a demat account.

Demat Account Charges

The demat account charges vary from one stock broker to another. There are the following types of charges:

  • Account opening charges
  • Maintenance charges
  • Brokerage or transaction charges
  • Custodian or safety charges
  • Demat charges (conversion of physical shares into digital format)
  • Remat charges (conversion of digital shares into physical certificates)

Several stockbrokers waive off account opening charges and offer affordable subscription packages to help you save costs on these charges.

Fill the details correctly 

Read the account opening form carefully and fill in the details correctly. Verify the details that you have entered in the form once before submitting it. If the details provided by you and those mentioned in the documents don’t match, your application will be rejected. 

File nomination 

While filling out the demat account application, it is easy to miss the step that gives you the option of filing a nominee. It is recommended that you file the nominee while opening a demat account because you might forget to add a nominee later. Adding a nominee is important as it makes the transmission of the securities faster if you need it in the future. 

Conclusion

A demat account is the most convenient, secure, and effective way to hold your securities and avail multiple benefits. Just make sure that you research thoroughly about the stockbroker and charges before opening a demat account.

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