A dematerialization account is similar to a bank account. However, you hold cash in your bank account while the former holds securities in an electronic form. The securities may be shares, mutual funds, bonds, or Exchange-Traded Funds (ETFs).
If you want to invest in shares, having a dematerialization account is mandatory. The account is opened with a Depository Participant (DP) that connects you with the depositories. Currently, India has two depositories; National Securities Depository Limited (NSDL) and Central Securities Depository Limited (CDSL).
Here are five benefits of a demat account:
1. Convenience and Flexibility
These accounts provide the flexibility to invest in a large number of financial instruments. You may invest in equities, insurance, fixed deposits, government and corporate bonds, mutual funds, and Initial Public Offerings (IPOs). Additionally, you may trade in derivatives through this account. Therefore, you enjoy the convenience of investing in multiple products through a single platform.
2. Avail Beneficial Information
One of the biggest benefits of a demat account is that you have access to beneficial information. You are able to check live share market updates and analyze your different investments. The service provider may also provide buy, sell, or hold recommendations to maximize your benefits. You may also make investment decisions based on market capitalization and other charts.
3. Stay Updated
Often, you may overlook important news announcements made by the companies. A reliable account will ensure that you stay updated and provide share market news related to your investments. The DP will send regular messages related to dividend declaration, results, buyback, merger, and other similar information. Additionally, you have access to analyst reports based on company performance, financial projections, and historical information to help make informed investment decisions.
4. Track Portfolio
An important aspect of financial planning is tracking the performance of your investment portfolio. With an online demat account, you are easily able to track the performance of your portfolio across different investment products. This enables you to make necessary modifications to suit your risk profile and return expectations. You are able to make smarter decisions with comprehensive tracking capability offered by the different types of demat accounts.
5. Set Alerts
Making timely decisions is crucial to maximize profits from your investments. You may be busy and not have the time to track movements daily. A dematerialization account allows you to set specific alerts to give you the necessary information to make investment decisions. Additionally, you may provide automatic buy and sell instructions when the securities reach pre-specified prices.
Uses of A Demat Account
1. Equity Trading
As per the regulations, equity trading i.e. buying and selling equities in physical form is no longer allowed. Dematerialization in equities was introduced in 1996 but it took over two decades to become a law. Since 2014, the Securities and Exchange Board of India made it mandatory to trade in digital equities only. Therefore, if you want to buy or sell stocks, you will need a dematerialization account.
2. Corporate Actions and Benefits
Benefits from your investment portfolio such as dividends, interest, and refunds are automatically received into your account. Additionally, corporate actions like a rights issue, share split, or bonus are directly available into your dematerialization account. This makes it easier for companies and convenient for you.
3. Dematerialization and Rematerialization
Physical securities may be damaged or lost. However, with dematerialization, all these risks are eliminated. You may convert your physical holdings to the electronic form through these accounts. You may also use the Rematerialization Request Form (RRF) to reconvert electronic holdings to physical form if required for any reason.
Dematerialization accounts allow you to trade in a convenient and safe manner. Moreover, you may invest in different securities and keep track of your investments in a single location.