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Home Finance Why do I Need to Open a Demat Account to Start Trading
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Why do I Need to Open a Demat Account to Start Trading

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September 13, 2022
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    Why do I Need to Open a Demat Account to Start Trading

    Investors who want to participate in stock trading and invest in other financial instruments like corporate bonds, ETFs, and government securities should open a demat account first. A demat account stores these securities digitally and also allows you to dematerialize physical shares into electronic form. Therefore, the demat account provides the essentials for online trading.

    Table of Contents

    Toggle
    • Types of demat account
    • How is a demat account crucial to start the investment journey?
      • Mandatory to invest in the stock market
      • Makes it easy to hold investments
      • Facilitates faster settlement of trades
      • Removes the barriers to trade
      • Loan facility
    • Tips to consider before opening a demat account
      • Choose a reputed broker
      • Analyze the brokerage and demat charges
      • Check the depth of services
    • Inquire about the technical assistance and customer support

    Types of demat account

    Four demat accounts are available depending on your nationality and investment needs. A BSDA demat account can be opened to access some of the basic demat services and features. If your investment value is up to Rs. 50,000, you don’t have to pay any demat account maintenance charges. However, if the investment value ranges between Rs. 50,000 to Rs. 2,00,000, you will have to pay a nominal AMC.

    A regular demat account, also known as a standard demat account, provides you with all the trading essentials required for delivery trading. You don’t need a demat account for trading in the futures and options, as taking delivery of contracts isn’t necessary.

    Repatriable and non-repatriable demat accounts are meant for an NRI (Non-Resident Indian). If you are an NRI and have an NRE (Non-Resident External) account, you can open a repatriable demat account. Transferring funds to abroad accounts is possible through this type of demat account.

    If you are an NRI but don’t have an NRE account, you can open a non-repatriable demat account and connect it with an NRO (Non-Resident Ordinary) account. However, you will not get the facility to transfer the funds abroad through a non-repatriable demat account.

    How is a demat account crucial to start the investment journey?

    It is necessary to open a demat account due to these reasons:

    Mandatory to invest in the stock market

    SEBI has made it mandatory to open a demat account to invest in the stock market. Through a demat account, you can invest in equities, debentures, mutual funds, and other asset classes. It allows you to diversify your investments and balance the risk factor associated with money market instruments.

    Makes it easy to hold investments

    You can hold and manage different types of financial instruments in one demat account. You can also open multiple demat accounts to manage different types of instruments separately. However, you will also have to pay extra AMC and other demat charges to maintain them.

    Every trade can be analyzed later if you have a demat account. You need to download a detailed account statement or check the combined contract notes for trades taken on a particular day.

    Facilitates faster settlement of trades

    Trades taken via a demat account are settled instantly as they are in electronic format. The shares get credited to your demat account in T+2 days, whereas earlier, each trade settlement required weeks due to the manual documentation process. Also, you don’t have to note down every transaction as the electronic transactions are automatically reflected in your demat account.

    Removes the barriers to trade

    Due to the availability of advanced trading platforms, you don’t need a broker to guide you through the trading process. You can analyze the fundamentals of a particular stock and evaluate its financial forecasts based on the reports available on these platforms. Moreover, stocks can be bought or sold with a single click. This has eliminated all the barriers to trading initially present in the system.

    Loan facility

    You can avail of a loan against the securities you hold in your demat account. You will keep receiving the dividends, bonus shares, stock splits, and other corporate benefits even as the loan repayment is in progress.

    Tips to consider before opening a demat account

    These are some tips that you can consider before opening a demat account:

    Choose a reputed broker

    Open a demat account with a reputed broker who maintains consistency in services and trading transactions. Check the online reviews on trusted websites to get insights into the quality of their services.

    Analyze the brokerage and demat charges

    It is recommended that you avail of the services of a broker who reveals all the details of brokerage and demat account charges in advance to avoid any conflicts later. Choose a broker who offers a flat rate on delivery and intraday trading instead of charging a percentage of the trade value as commission.

    Also, you must go through the AMC, custodian fees, and other demat charges before opening a demat account.

    Check the depth of services

    Services like MTF (Margin Trading Facility) enable you to take a favorable position in the stock market even if you don’t have enough funds. Also, in-depth research tools and analytics help you to scrutinize your investment decisions accurately. Therefore, you must always check the depth of services and MTF brokerage rates before finalizing the broker.

    Inquire about the technical assistance and customer support

    Ask yourself these questions before opening a Demat account:

    • Do you have the option of comparing a stock with its peer companies in terms of PE ratio, annual return rate, sales growth, and other parameters?
    • Can you maintain multiple watchlists and create equity baskets according to your trading and investment strategies?
    • Can you see forecasts and detailed stock analysis on your demat account?
    • Does the broker provide multiple platforms, like email, chat, telephone, etc., for addressing the concerns and queries of their customers? 

    If a broker provides satisfactory answers to all these questions, open a demat account with them.

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    • open a demat account
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      A content writer with nearly a decade of experience helping brands and businesses communicate with their audience.

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