A Demat account that was introduced in 1996 changed the landscape of the Indian stock markets. The hassle of physical trading of shares like loss, theft, forgery, etc., were eliminated as trading shifted to electronic trading systems.
In the current scenario, it is essential for traders and stock market investors to hold a Demat Account. Companies are coming up with free Demat account for the benefit of the traders and investors. However, here are some benefits and disadvantages of the same that we need to be aware of before signing up for a free Demat account.
Advantages of Free Demat Account
- Higher Safety and Security: One of the essential advantages of a Free Demat Account is that it offers safety and security. When the shares were held in a physical format, the risk of loss and theft of shares was always higher as the shares were traded in the form of share certificates. In case of loss or theft of the share certificates, an investor would have to go through a lot of paperwork and operational challenges so as to recover those assets. However, there was no guarantee of recovery. Holding the shares in a Demat Account is safer and more secure. The chances of theft or loss of shares are negligible in the case of a Demat Account.
- Faster Settlements: Prior to the dematerialization of shares, it took 14 days for the settlement of the trade due to the physical movement of the shares. With the introduction of a free Demat Account, the settlement cycle has been reduced from 14 days to 2 working days. This not only saves an investors’ time but also the efforts involved in trade settlement.
- Reduced Errors: Physical and offline settlement of shares was accompanied by a lot of manual errors. These errors were often termed as Vanda or error trades. One of the biggest advantages of Demat Account is that these erroneous trades have been reduced.
- Ease in Transmission: In case of any uncertain situation, like in the case of the death of the Demat Account holder, the ownership of the shares held in the Demat Account can be easily transferred to the nominee. This can be done easily by either opening a Joint Demat Account or adding a nominee to the Demat Account. This wasn’t easy when shares were held in the physical form. The legal heirs had to undergo a lengthy process to claim the rights of the financial assets of the deceased person. Easy transmission is the other benefit of a free Demat Account.
- One-stop storage for all financial assets: A free Demat account not only stores the shares held by the account holder. It can store all the other financial assets like debentures, bonds, ETFs, unit-linked insurance policies, etc. Thus, a free Demat Account is the perfect place for you to hold all your financial assets. This also makes it easier for the trader to manage, track, and maintain their financial assets. Filing for taxes also becomes easier as all the financial records are maintained in a single place.
- Reduced Cost: One of the biggest disadvantages of having a Demat account in early times was the high cost associated with the opening and maintenance of the Demat account. However, with the introduction of a free Demat account, this drawback has been eliminated. A free Demat account like the one offered by RMoney comes with zero account opening charge and zero AMC.
Drawbacks of Free Demat Account
Every coin has two sides. Likewise, a free Demat Account also comes with its own set of drawbacks, which the trader should be aware of before signing up for an account. Here are some of the disadvantages or drawbacks of a free Demat account.
- Dishonest Brokers: All the stockbrokers these days are offering free Demat accounts making it difficult for the traders to select the right one. Selecting an honest broker is a tough job. Hence, traders should always opt for brokers who follow the highest standards of corporate governance and ensure 100% transparency in their dealings like RMoney.
- Portfolio Churning: Trading is just a click away with a free Demat Account. This ease in trading has resulted in traders constantly buying and selling shares and other financial assets, which affects clients’ long-term wealth creation goals. A Demat Account facilitates ease of trading, which results in many investors indulging in short-term trades instead of focusing on long-term wealth creation.
- Tech Savvy: You need not be an expert at technology, but you surely need to be tech-savvy to understand and operate a Demat account. Investors depend on their brokers to put through a deal that can lead to fraud or misappropriation of funds by the broker.
Free Demat Account comes with its own sets of negatives. However, the negatives of having a free Demat account are outweighed by the positives it has to offer. Since having a Demat account is the prerequisite of starting stock market trading, instead of avoiding bad brokers, the traders should conduct appropriate research and open a free Demat Account with a broker with good reviews and can be trusted.