Myths About Demat Account

There was a time when trading was considered an investment avenue available only to a select few. However, with the advent of online tools and platforms, trading has become an accessible option for many around the country. If you have an internet connection, the will to research and some form of required capital, you can open your very own demat account and start trading in no time.

Financial markets thrive by the presence of participants. Unfortunately, one of the primary factors holding back potential traders and investors in India is the spread of misinformation about the world of online trading. In particular, there are a number of myths surrounding an essential concept - demat accounts.

To dispel such myths as well as to explore the question of exactly what is a demat account let us take a closer look at the topic:

What are demat accounts and how do they work?

In India, trading used to take place by the means of transferring securities in the form of physical certificates. However, in 1996, demat accounts were introduced in the country, and it revolutionised the arena of trading as it exists today.

'Demat' refers to dematerialisation which is a process by which physical securities are converted into electronic format. Therefore, a demat account can be used by a trader to hold, transfer and transact in securities without the hassles of dealing with physical securities. As a result, it is a safer, quicker and much more efficient method of storing securities and executing trades.

Myths about Demat Accounts

Let us review some common misconceptions about them as well as the facts on the topic:

Myth 1:

A common misconception about demat accounts is that they are only useful for stock market trading and only serve the purpose of holding shares.

Fact:

The truth about demat accounts is that they serve a variety of trading purposes and can be used to store a number of different types of securities. In fact, demat accounts are incredibly useful if you are someone who likes to invest in both equity as well as debt instruments. Demat accounts can be used to hold not only shares but also bonds, mutual funds, exchange-traded funds, government securities, corporate FDs and insurance policies.

Myth 2:

Another misconception about demat accounts states that since demat accounts store securities in an electronic format, it makes them unsafe and prone to security risks.

Fact:

This misconception is almost entirely based on the fears that arise out of new technology. It is common to make the leap between a process that takes place online and risks of security breaches.

However, demat accounts are well protected from such breaches as per the strict guidelines laid out by the regulatory body known as the Securities and Exchange Board of India, or SEBI. Providers of demat accounts have to ensure that their trading platforms are safe and are equipped with appropriate firewalls.

Moreover, your demat account has its own unique number and you can only log in to your account through your unique, secure password. Further, every transfer or transaction of securities that involves your demat account requires its own transaction password.

Myth 3:

A common myth about demat accounts that discourages potential traders is that you cannot open multiple demat accounts.

Fact:

This myth is completely untrue. There are no limitations placed on a trader when it comes to the matter of opening multiple demat accounts. In fact, it is a common strategy used by traders to conduct different types of trading with different demat accounts. An essential document that is required from a trader before opening a demat account is his or her PAN card. With a single PAN card, you can open multiple demat accounts. If it is required by SEBI to review your trades, they can do so by the means of your PAN card and hence, the number of demat accounts you open does not matter.

Myth 4:

Another myth about demat accounts is that a minimum amount of balance is always required to keep it functional.

Fact:

This misconception about the minimum balance requirement is also inaccurate. Even if your balance amount is zero, your demat account will continue to be functional. You are not obligated to hold financial instruments in the demat account at all times and can bide your time till you are ready to begin trading again.

Conclusion

Now that we have covered the question of what is a demat account as well as dispelled the many myths that surround it, it might offer encouragement to potential traders like you to get started in the world of trading. The first step towards the process is to open a demat account online with a reliable depository participant such as IIFL. With IIFL, investors and traders can avail an all-in-one account through which you can trade in multiple securities online, at your own convenience.