Margin trading is becoming more and more common in the Indian market, even for people with small portfolios. This new trend brings with it great opportunities but also many risks. The most important tool to safeguard your investments is a demat account.
When one is buying shares, they are kept in electronic format on an exchange platform. If they are selling them, the shares are taken back from there by the person who bought them from them. Before these transactions take place, they have to be booked or validated at the central depository services (India) limited. CDSL will do this after proper verification of both parties involved in the transaction – buyer and seller. Thereafter, shares in physical format (known as certificates) will be issued, and the respective parties will hold these certificates.
The demat account is created when one opens an equity trading/broking account, and this enables them to book their transactions electronically when buying or selling stock on an online trading platform like BSE or NSE.
1. A safe place for holding securities: As mentioned earlier, physical share certificates are exchanged for electronic book entries after each transaction, so there’s no need to worry about one’s securities being lost/misplaced by the other party involved in it. This process ensures the security of all investments which are being traded through CDSL. Thus, this holds even if the original certificate (in physical format) is misplaced by the buyer or is lost in transit.
2. Convenience of operations: A demat account allows for their investments’ easy and more efficient operations. The operational ease includes receiving dividends, interest coupons (if fixed deposit), etc., securely through electronic means rather than share certificates which need to be collected and stored with care.
3. Tax benefits: There is no capital gains tax on the sale of listed securities in a demat account, and the long-term holding period for such transactions has been reduced from 3 years to 2 years. Even short-term capital gains (on shares held up to 36 months) are taxed at just 15%.
4. Clearance of trades: When one sells shares, the clearinghouse will ensure that the money is credited to their account electronically via RTGS / NEFT and not by a physical transfer of cash from one account to another.
5. Protection against fraud: There’s an added benefit if one dematerialize securities – it reduces the chances of share certificates being physically stolen.
6. Access to money faster: The process for electronic transfer is much faster than the traditional RTGS / NEFT systems, so they can have access to their money faster compared to physical transfers between banks.
7. Better records: A demat account provides a near-accurate picture of all one’s transactions, which are recorded online. This is more convenient for account-holders since both buyer and seller can easily access these records whenever required.
For example, if one had bought 100 shares of ABC Ltd at INR 100 each on August 1st 2020, but forgot all about it, then the company will debit their bank account with Rs 10,000 after the sale of those shares on January 1st 2021.
In demat account; small amount of money can change many more enormous outputs. A change of 5paisa in allone’s shares can significantly decrease or increase the value of their entire portfolio.
So, these were some extremely good reasons to open a demat account.