Five Benefits of Opening a Demat Account

Five Benefits of Opening a Demat Account

By now we know that the opening of demat account online is the first step to creating wealth in the capital markets and holding your securities in demat form. There are a plethora of demat account benefits which we will look at in greater detail here. In the last 25 years since demat was first introduced in India, a lot of improvements have happened. For instance, the demat account opening charges and other costs have come down sharply making demat accounts affordable. You have demat accounts with zero AMC, zero account opening charges and a host of other benefits. Technology has also made advances to the extent that today if you have a mobile trading then the demat account app that is in-built into trading system makes your life a breeze. 

Before we get to the opening of demat account online and the demat account benefits, it must be remembered that the entire idea of demat was to overcome of the challenges of physical share ownership and transfer. That is something it has largely achieved. Also, Demat was instrumental in overcoming problems like bad delivery, signature mismatch, duplicate certificates etc. 

Where do the merits of demat stem from? The benefits of opening demat accounts largely stem from the risks and pitfalls of the physical ownership system. The entire trading activity in India has become a lot simpler and more foolproof as a result of demat accounts. That is clearly an advantage and that, in turn, has helped boost equity and F&O volumes in a big way. From an investor’s point of view there are several palpable advantages that are visible.

1. Overcomes the hassles of physical delivery and the risks

Demat overcomes a number of typical risks that were present in physical delivery of shares. In the physical settlement format, the  shares had to be held in paper form, which itself was cumbersome and ran the risk of theft, loss of certificates, misplacement etc. In addition, these certificates had to be physically sent to the company’s registrar for transfer of ownership. This created a lot of logistical problems. Quite often, the share certificates were either lost or misplaced in transit. Many times, they even got defaced by the forces of nature, making them unusable At times, certificates reached in a partially damaged condition and hence were rejected. These problems are resolved by demat.

A related aspect of physical delivery that demat overcame was the risk of bad delivery. Under the erstwhile physical settlement system it was common to see a medium to large sized broker employing a dedicated team of administrative personnel working purely on the rectification of bad deliveries. These bad deliveries happened for different reasons like signature mismatch, name order mismatch, name spelling, incomplete details in the demat account transfer form etc. In one stroke of the pen, the demat system resolved all these problems as none of these problems were even relevant in the demat mode.

2. Resolving corporate actions and shareholder communication

What exactly are corporate actions. These include dividends, stock splits, rights, bonus issues etc. In the past, corporate actions like bonus and splits would entail sending the old certificates physically to the registrar and getting the split certificates with new folio numbers from the registrar. Demat overcomes these hassles. For instance, bonus shares and the split shares are automatically credited to your demat account as long as your name appears in the company register on the record date. In the case of dividends also, the need for dividend warrants is obviated as now dividends are automatically credited to your bank account.

The other issue is on the customer communication front. It is so much simpler under demat system. For instance, if you are holding shares of 10 companies in physical form, then a change of address will have to be individually intimated to the registrars of each of these companies. That is not required any longer in the demat system. Demat solves that problem. You just write a single request to your depository participant and the details of your changed address are automatically downloaded to all your investments. This rule applies to all your shareholder communication on your investments.

3. Demat is economical and also addresses odd lot problem

Let us address the odd lot issue first and foremost. Demat addresses the odd-lot problem which used to be a major hassle in physical certificates. Under the physical system, you could buy and sell shares only in specific lots of 50 or 100 shares. In the case of high priced shares, the odd-lot requirement kept most of the small investors out of its ambit. However, that is not the case with demat since in the demat system, you can even buy or sell just 1 share of the company. From the standpoint of a small investor, demat is a lot friendlier and also a lot easier on the pocket but also more democratic in terms of opportunities.

Let us now turn to the cost-effective part of demat account. Demat is cost effective from the perspective of the company, the broker and the investor. Essentially, it makes economic sense to everybody. Since there are no physical shares involved, demat does not attract stamp duty. With bad deliveries almost eliminated post-demat, brokers are able to put their manpower to much better use. Above all, most of these cost savings are being passed on to the investors in the form of lower brokerage charges and that is leading to all round growth in business.

4. Demat complements the trading ecosystem to perfection

It is not just demat in isolation but demat account online combined with internet banking and online trading that is the real differentiator to the trading ecosystem. Demat account online combined with internet banking and online trading creates a seamless chain of value added transactions that are simple and efficient. The purchase of shares in your trading account, the debit from your bank account and the subsequent credit to your demat account happens seamlessly without any efforts from your side. In the event of sale, the reverse logic also works to perfection.

5. Demat has empowered IPOs like never before

In the old days, investors would apply for an IPO and wait for 3 months to know the status and they would either get shares allotted or a refund order. Today, the IPO process has been condensed to about 10 days and that thanks largely to demat accounts. It is the big difference in IPO investment. With shares directly credited into your demat account on allotment, the shares are now available for selling from the day of listing itself. Demat has given a big boost to IPOs.

To summarize, demat accounts have been able to condense your entire investment portfolio into your smart phone. It is literally 24X7, since you can operate it anytime and anywhere. That is the big Demat takeaway !