If you have knowledge in share trading most likely you have heard of demat accounts and if you are already started investing in stocks, then it is a must-have thing for you.
Demat accounts keep your securities, stocks, and other investment assets digitally without worrying about losing the stock certificates and any theft of the same.
If we count the positive ways, there are numerous ones of a dematerialized account or demat account. But, do you know, like all other things, there is a flip side too of a demat account?
There are many disadvantages of a demat account too that you should know before you grab one for yourself.
Let’s first understand,
What is a demat account in brief:
A demat account is a type of account that allows investors to hold their securities in an electronic form, instead of physical certificates.
The term “Demat” stands for dematerialization, which means converting physical shares into digital format.
A demat account is like a bank account, where you can deposit and withdraw money.
Through a demat account, you can buy and sell
- Shares.
- Bonds.
- Mutual funds.
- ETFs,
and other financial instruments, instead of money. A demat has lots of benefits that’s why demat accounts are popular, and without a demat account, you cannot be involved in trading and holding your stocks safe. However, it has some drawbacks too. Let’s discuss them.
Disadvantages of demat accounts:
A demat account has made the buying and selling process super easy for investors. The whole process is electronic which is obviously the demand of this era, but still, these drawbacks cannot be ignored.
Annual charges:
Well, that is the thing with most banks and financial institutions. You need to pay fees annually depending on various aspects. When you open a demat account, there is an account opening fee. However, after one year you need to give annual charges for your demat account.
Depending on the bank or financial organization, the type of the demat account, and how many securities you have on your demat account, you need to pay the annual charge.
As the charges are different, there are many banks too, who do not charge any annual fee at all.
Let’s come to the next one.
Enhance the share trading frequency:
A Demat account makes the process of buying any stock and keeping it safe in your account very easy. Previously when the dematerialized account was not in action, people used to keep their stock certificates in physical form. But now when buying and selling stocks are so easy and convenient, people tend to buy and sell their stocks more frequently. The main problem of buying and selling stock so frequently is, they miss their chance of bigger returns which they would get if they invest in the long term. Compared to short-term, long-term investments offer much higher returns.
Limited Choices to make:
As an investor, you may want to diversify your investments. That is a very clever practice, to counter any sudden market crash. If you invest all your wealth into a specific type, chances, are you may face losses when the market is down, or your returns may not meet your expectations. That is the reason, expert investors, always diversify their investments. That helps them gain overall good returns. But, demat accounts only allow you to invest in the registered securities on stock exchanges. Apart from them, you cannot invest somewhere else. For example, investing in precious metals, such as gold, platinum, and silver is a great decision, but to invest in them, you need to go to a separate platform, that allows you to do so.
Technical and deep knowledge is required:
A Demat account is an electronic account that holds all your securities in digital format. Here you can buy and sell your stocks on your own. All the process is fully digital and can be operated through any digital device. On the account, there are various options and terms that are related to the stock investments, and funds. So, you need specific financial knowledge and awareness.
It does not necessarily means that everyone would be familiar with and can easily operate a demat account. If you are not familiar with the demat account, you may face trouble managing your securities and investments. Also, demat accounts create a communication gap between the investor and the brokerage firm.
That is why, you may miss important updates and notifications from the brokerage firm, or the financial firm.
A fraudulent activity might take place:
You may be heard that in recent times, when more and more people are doing online transactions, various spammers are doing up with their unfair practices. That’s the reason, now, bank frauds and other online banking frauds are rising in numbers. The same thing often happens with demat accounts too. Demat accounts are vulnerable to hackers. If someone can break the security and can get access to your demat account, they can manipulate the securities you have in your account, or can steal the information from your account.
These are some disadvantages that demat accounts have. So, before you get one for yourself, make sure, you have a considerable amount of knowledge in the finance and investment sector.
Wrap up:
Well, these are some practical disadvantages of having a demat account but in the current situation, when everything is digital, it’s impossible to avoid the importance of a demat account. Although the function of a demat account is the same depending on the bank or financial organization, you get different features, and their charges are also different. To avail of the best benefits, you have to check all the features and benefits of the company.
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