A journey of a thousand miles begins with a single step
Last updated – 03 February 2021
The awareness amongst the general public about equity investing has increased exponentially in recent years. Still, there are many people who have not started investing because they think it is complicated and they will have to research a lot before starting.
If you are serious about investing, your thinking should be translated into action. And the first baby step towards investing is to open a demat account.
What is a Demat Account
A demat account is like a bank account, except that it is used for storing shares instead of cash.
Earlier, when companies issued shares, physical share certificates were issued in the name of the buyer. But since the late 1990s, shares are now compulsorily issued in dematerialized form i.e. in digital form. There is no longer any paperwork involved in buying or selling shares.
Nowadays, you just need to open a demat account with any broker of your choice and you can
start buying/selling shares at the click of a button.
Also read – Difference between demat and trading account
Need and Importance of Demat Account
#1. Diversification of your savings
You can use a demat account not just for shares but also for bonds, mutual funds or REIT units.
Thus, with one single demat account, you can invest across a variety of asset classes and diversify your investment portfolio.
#2. Safe-deposit locker for your shares
When shares were issued in physical form, they would sometimes get lost or stolen or even get spoilt if not stored properly.
These issues have been solved with demat shares. A demat account is like a secure locker for your shares. There is no risk of your shares getting lost, spoilt or stolen from your demat account.
#3. Low transaction costs
Most brokers will not charge anything for opening a demat account. Further, you will be charged a very nominal ‘Demat Account Maintenance Fee’ yearly, which will most likely be less than INR 500. So, opening and maintaining a demat account is cheap and hassle-free.
#4. Regulatory protection to investors
When you go to a broker for opening a demat account, the broker will open your demat account with either CDSL or NSDL. CDSL and NSDL are ‘depositories’ incorporated by the market regulator SEBI. The shares in your demat account are actually held by these depositories.
These depositories have regulatory protection and approval, hence there is no risk involved for investors. Even if your broker goes bust, you will not lose your investments in your demat account as the broker is just an intermediary.
#5. Easy to operate
It is very simple to open and operate a demat account. Nowadays, you can open a demat account within 30 minutes online by submitting a few documents.
Once you have a demat account, you can easily buy or sell shares at the click of a button.
Even if you want to switch your broker, you can do it easily by filling a form called DIS (Delivery Instruction Slip). Similarly, if you want to transfer your shares to someone else, that is also very hassle-free.
#6. Provides updated status of your portfolio
With a demat account, you can get a daily real update of the value of your investments. You will just need to login to your brokerage account to get the latest status of your investments.
You will also get detailed monthly reports by NSDL or CDSL (depending on where your demat account is) providing your investment value, % return, monthly movement of portfolio, etc. There is absolutely no effort required from your end to ascertain the value of your investments at any time.
#7. Liquidity advantage
The investments in your demat account are extremely liquid. You can buy shares the same day you transfer funds to your demat account.
Similarly, if you are in need of liquidity, you can sell your shares and withdraw funds within 1-2 days of selling. Thus, in case of emergencies or needs, you can always liquidate your investments from your demat account in no time.
The convenience of a demat account is almost like a bank account. If you have spare cash, it makes a lot of sense to keep your funds in investments rather than keeping them idle in your bank account.
Like a bank account, a demat account is an absolute must-have to manage your finances.
If you do not want to spend time researching and investing in equities, you can even buy fixed income instruments or mutual funds with your demat account. If done right, your demat account will help you make money with your money.
So if you do not have one already, please open one right away.