If you’ve traded/invested in almost any security in the recent years, you’re surely aware of the term “Demat Account“. Usually opened at bank accounts, or with leading brokerage houses like Goodwill, you must have surely wondered why you’re required to open a demat account in the first place, especially when you’re also asked to open a trading account.
So – what are demat accounts? Do we really need two different types of accounts to perform trades? What are the advantages of demat accounts in India? In this article, we’ll go through the many nuances involved, and by the end of it, you’ll have answers to all these questions.
Demat Accounts Vs Trading Account
Demat accounts are very different to trading accounts.
A Demat Account is a bit like a bank account for your share certificates and other securities that are held in an electronic format. This can be used for trading stocks or any other securities like bonds, commodities, derivatives, mutual funds, and IPOs.
A trading account on the other hand, is opened with the stock broker, to ensure that the trades are effected. The balances in the trading account will be in a form of a number of shares or units of mutual funds and can be withdrawn and transferred to your actual bank account at your convenience.
What does Demat stand for?
The word Demat is short for the word “dematerialization”.
Dematerialization refers to the process of converting physical assets into electronic form and making them available for trading or investment purposes.
Let’s use an example to understand why demat accounts are needed. Say you want to purchase shares of Company ABC. You will need to transfer those shares into your name once you purchase them. Formerly, you received physical certificates bearing your name from the exchange.
As you can imagine, this involved a lot of paperwork. Every time a share was bought or sold, a physical certificate had to be created. This led to a 15, 16 day settlement cycle, and was not robust enough to facilitate secure transactions.
The Demat Account system was introduced for trades on the NSE in 1996 to eliminate this paperwork.
Purpose of Dematerialization
As mentioned above dematerlization is a process of transferring physical securities into electronic form. It means that there is no room for a physical certificate to be lost and no need to keep it at home. The Demat account offers you an opportunity to buy stocks online, manage your portfolio, and transfer funds easily with the help of your mobile phone or computer.
Dematerialization benefits both investors and companies.
It also reduces the time taken to transfer shares. The entire process of dematerialization is done electronically, thus reducing paperwork and reducing the transaction costs associated with transferring shares. This can be especially useful for large companies that have to deal with multiple shareholders or family members who might want to sell their stake in a company at once.
By having a Demat account, you can:
- Transfer your investments without having to visit an exchange office physically or post office.
- Reduce the time taken to transfer shares. Ensure that you have the original share certificates, which will help with any claims or disputes regarding your investments.
Dematerialization helps to reduce fraud
One of the biggest advantages of Demat accounts is that it helps to reduce fraud by removing the need for physical certificates. A Demat account is required for secure transactions, which means that your money cannot be stolen if you lose or misplace your certificate. In addition, if someone tries to steal your certificate from one institution and use it fraudulently at another, then they will not be able to transfer funds because all transactions must be done through an online system like SEBI’s MTNL2 connectivity program or UPI (Unified Payments Interface).
No stamp duty is levied on Demat transactions.
You should know that there is no stamp duty on the transfer of shares to your name. It is a one-time process, and it’s done electronically. The transfer of shares to your name will be done through electronic means, which means that you don’t have to physically go anywhere or fill out any paperwork for this transaction.
However, you will be subjected to pay STT, and, in case you’re selling your shares at a profit – you’ll have to pay capital gains tax associated with it. For more details about the fees that you are likely to incur in a transaction – feel free to check Goodwill’s Brokerage Calculator!
Understanding the holdings better
You can see all the transactions that have happened in your account. This will help you understand what has been happening with the shares and how much you have earned or invested in them. You will also be able to monitor any dividend payments made by companies, as well as tax payments on those dividends.
Holding multiple classes of securities in one account.
If you have a portfolio of various classes of securities, you can hold each class in one account. For example, if you are a retail investor and want to invest in stocks, bonds, mutual funds, and ETFs from multiple companies ] but with different risk profiles (for example blue chips versus mid-cap), then there is no need for multiple accounts. You can open an account that has all these securities in one place!
Main Difference between Demat and Trading Account
A Demat account is a shareholding account. It can be opened at any bank or SEBI-authorised broker such as Goodwill and will allow you to buy or sell Indian equity shares, debt securities, and derivatives.
A Trading Account is an investment option that allows you to trade in financial markets like stocks, forex, and bonds. A trading account can be opened with any broker or through your existing Demat account with another brokerage firm if you already have one in place.
Where you can Open a Demat and Trading Account?
You can open a Demat and Trading account with Goodwill the best share broker in India. Get the benefit of free Demat and Trading account opening in less than 5 minutes. Open an account with Goodwill hassle-free and start trading the same day. Goodwill is just a call away.