Demat account provides for ease in transactions related to trading of shares on the markets. A demat account is nothing but an electronic storage of shares purchased by an investor. Electronic transfers are a safe and convenient mode of effecting instant funds flow along with the transfer of shares. The Indian Depositories Act, 1996 envisioned an improvement in the trading process which was in place in older times. Previously, investors in shares of any joint stock company had to keep records and maintain physical share certificates to claim their possession and ownership on the shares.
This was a tedious process and involved much work for traders, brokers and even the company issuing shares. Nowadays, with dematerialisation of shares and electronic trading, the process has become more advanced and fast. Traders can open demat account online with the advice and guidance of broking firms. Brokers are skilled in the operation of demat and trading accounts, and the traders can approach them for more information, please follow the link. They have the technical information related to the operation of the demat account, along with the latest Government regulations pertaining to operation.
Though the demat account provides for a coordinated and quick trading experience, it also has certain downsides. As the trading is conducted electronically, security can be a major threat. Also, as anyone can open demat account online, the market is prone to higher volatility because of the entry of speculative traders. Here are some of the issues that traders could face with demat implementation:
Risk of fraud: Users of the demat account need to be conversant with the Internet and computer technology to operate it. As the interface, transactions, and even payments and incomes are online, this is very necessary. Traders are prone to internet frauds in case they are not very tech savvy, or aware of the online frauds and ways to prevent mishaps.
Charges for demat account: Opening a demat account is not free of cost. As brokers provide the professional service of opening, handling, maintenance and operations of the demat account, they charge fees and allied charges from traders. This is the cost of investment in shares, which has to be borne by the trader.
Maintenance dues: Additionally, traders also have to pay maintenance charges for the upkeep of the electronic demat account to the brokers. These charges are applicable even if there are no share investments held in the account. Maintenance charges are levied for services such as – record keeping, correspondence, grievance handling and other investor-related issues.
Dormancy issues: Often professional traders neglect to keep a track of the number of demat accounts held in the investment portfolio. It is legally permissible to own more than one demat account. If an account becomes dormant due to low activity, the trader still ends up paying the charges related to maintenance of the account to the broker.
Cybersecurity risk: Demat accounts are prone to cybersecurity risks such as – virus attacks, malware and phishing. Traders have to instal adequate security softwares to reduce the risk of a security threat
Regulatory frameworks: Demat accounts are regulated by the SEBI (Securities and Exchange Board of India). There are various regulations and laws which need to be taken care of for smooth operation of the electronic trading process.
Risk of manipulation: Stockbrokers have an important role to play in the markets, as they are the main intermediaries for trading. Investors are at risk of manipulation of the markets by stock brokers, as they can collectively bring the sentiment up or down. Traders should be careful in investing, and not rely only on market sentiment or react to market turmoils.
Dependence on intermediaries: Users of the demat account are dependent on the stockbrokers for opening the account, to guide them on operations, provide investment advice and also be up to date on the regulatory frameworks. Most traders need support and can deal in trading independently only after some experience in the markets.
The trading environment has become more dynamic and inclusive since recent times. Dematerialisation has brought in much respite to traders as they do not have to deal with physical share certificates anymore. Share transfers along with payments are electronic and can be done in a cost-effective manner in less time. The trading process has become more professional with skilled brokers to assist the traders.
However, there are some downsides to the demat account implementation. Traders have to pay registration and maintenance charges for the operations. Also, there is much dependence on brokers for fulfilling regulatory requirements, as demat accounts are regulated by SEBI, the market regulator. Apart from this, as trading and settlements are completely online, traders are also at risk of cyber frauds and virus attacks. They need to be adept at handling computers and the Internet for a smooth trading experience.