A demat account, introduced in 1996, eliminated the hassles involved in offline stock trading, like theft, forgery, damage of paper-based securities, etc. It has shifted stock trading to an electronic system. Following the SEBI (Securities Exchange Board of India) rules, an individual needs a demat to participate in the stock market. It is a repository to hold your financial securities safely. You can invest in numerous securities using a demat account, including listed or unlisted stocks, mutual funds, bonds, exchange-traded funds (ETFs), Initial Public Offerings (IPOs), and others.
Types of Demat Accounts
There are two types of Demat Accounts:
- Basic Service Demat Account (BSDA)
- Regular Demat Account
A BSDA is a free demat account as per the SEBI rules. There are no account maintenance charges (AMC) applicable to a basic demat account. It restricts individuals to a holding value of financial securities of up to two lakhs. If the value exceeds two lakhs, the broker will change the status of BSDA to a regular demat account. You can find brokers offering free regular demat accounts also to compete in the brokering industry. Thus, to open the right demat account, you should know the types of a demat account also, besides, ‘what is a demat account’ and its requirements.
There are numerous advantages of a free demat account. However, there can be a few disadvantages also that you need to be aware of before signing up for a free Demat account.
Benefits of a Free Demat Account
A free demat account offers you the following advantages:
- Security of your Financial Assets: A demat account whether a free or regular one allows you to hold your securities. It is a safe repository against fraud and spurious activities under SEBI’s surveillance.
- Error-free Account: There are minimal chances for an error in the record of your demat account holdings as the entire system in the stock market is digital. You can motivate yourself to engage in more investing activities with greater security and electronic storage.
- Affordable Investing and Trading: You can save on regular demat AMC with renowned stockbrokers. They waive off the online demat account opening fee and AMC for the first two years.
- Segregate your Investing and Trading Portfolios: Many investors prefer to open different demat accounts to manage their long-term and short-term portfolios. SEBI allows individuals to open multiple demat accounts with different brokers. You can open one demat account for free for your long-term investment goals and another with a stockbroker offering advanced online trading services and charging accordingly.
Drawbacks of Free Demat Accounts
- Prone to Dishonesty: Before signing up for a demat account, do your research to find the registered brokerage firm with the SEBI. It is always good to look for reputed brokers who serve their clients with high-quality standards and greater transparency.
- Portfolio Churning: Stock markets are just a click away with a Demat account. A free demat account may make investors involved in short-term trading more. Instead, they should focus on long-term investing for wealth creation by utilising a free demat account.
- Lack of Technical Advancement: It may be that a free demat account is offered with a limited list of securities that it can hold electronically.
- Lack of Support: A free demat account is a good option for novices in the stock market as they may start small and want to invest in securities only. But a lack of support from the broker may make your investing journey uncomfortable in the beginning.
Thus, investors can open a free demat account with caution. Most long-term investors prefer to sign up for a demat account with a reputable discount broker to prevent issues, like high charges, or technological restraints.