India’s stock market is characterised by its diversity. You can invest in a wide array of asset classes, ranging from shares to bonds, derivatives to mutual funds and commodities. What is more is that there are several sectors and indices to invest in, which makes it easy to diversify your portfolio and limit your overall risk exposure. There are some prerequisites of participating in the securities market, one of which is having a functional demat account. In this article, we shall discuss the objectives of a demat account and how is instrumental to trading.
What Is a Demat Account?
A demat account is a digital instrument which has been designed to safely house the securities purchased by an investor from the securities market. In the wake of the stock market’s transition to an electronic trading and settlement mechanism, demat and trading accounts have become integral to the process of trading.
While a trading account serves as the interface between investors and stock exchanges for order placement and execution, a demat account is where the securities are credited (in case of a buy order) and debited (in case of a sale order). You can open a demat and trading account online and start investing in the market.
Prominent Objectives of a Demat Account
Demat accounts serve several objectives and play an instrumental role in the efficient functioning of the stock market. Here are the major objectives of a demat account:
- Storing financial assets in a digital format: The foremost aim of a demat account is to store capital market securities in a dematerialised form. By virtue of a having a functional demat account, you can avoid unnecessary stress about the safe storage of share certificates, debenture certificates, mutual fund policy documents, etc. You can access the demat securities owned by you by logging in to your demat account.
- Streamlining the trading and settlement process: Another key objective of a demat account is to ensure the seamless operation of the trading and settlement process in the securities market. Investors, trading accounts, bank accounts, demat accounts, and stock exchanges form a chain of essential elements in the process, and each plays a critical role. In addition to storing freshly purchased demat securities, a demat account can also be utilised to store physical securities converted into demat securities.
- Ease of access and monitoring: With a demat account, you can access your investment portfolio whenever you wish to, and check the asset allocation, latest market prices, gains or losses till date, etc. Since the access to your demat and trading account is restricted by log in credentials which are privy only to you, there is very little chance of the misuse of any information (unless you share the login credentials with anyone.)
- Facilitating portfolio diversification: One of the most important objectives of a demat account is that it facilitates the diversification of an investor’s portfolio. A demat account can be used to store shares, debentures, bonds, mutual funds, and several other financial assets, thereby preventing investors the hassle of opening separate accounts for different types of securities.
- Savings in the cost of investing: The total cost of investing is a significant metric and has a bearing on the net returns from any investment. As such, trading through demat and trading accounts results in substantial savings owing to the reduction in costs such as stamp duty.
To Sum It Up
In the twenty-first century, it is impossible to contemplate the smooth functioning of the securities market without demat and trading accounts. Both accounts serve a wide array of objectives and help make the process of trading transparent, time-efficient, and inclusive.
