Factors to know about Demat Accounts
OK, so you want to begin participating in the stock markets. Demonetization has kicked in and the markets have fallen over the past month. However, the “experts” are saying that now is the time to buy. The time is perfect: after all, you want to buy low and sell high. However, in order to do that, you need to be able to buy and sell shares of stocks. That can only happen by opening a Demat account, and this article will cover everything you need to know about Demat accounts.
The first step is to open a Demat account. In case you don’t know what Demat accounts are, it is short for a dematerialized account. Since we live in the digital age, shares of stock that you purchase are not issued through “paper shares,” as they were back in the old days. Instead, all shares are now held in Demat accounts.
So how are Demat accounts opened? If you have a bank account, there’s a good chance you get offered a 3-in-1 account. This is a package dead consisting of a bank account, trading account, and Demat account. (The trading account is used to buy more complex trading products like Futures and Options; we’ll ignore that for this article). Demat accounts, many times, get opened in tandem with bank accounts.
The other option is to go with a non-banking brokerage firm, such as Upstox. There, you get the option of opening a Demat account (as well as a trading account, if you opt for one).
So the lingering question is this: how do pick a bank or broker to open up that Demat account, and what are all the different factors that you should be aware of?
Avoid 3-in-1 accounts
Bank representatives are great people, but when it comes to luring you into opening a Demat and Trading account, you’re simply better off not opening them with the bank.
The reason is simple: a bank’s purpose is to serve your banking needs. By assigning a relationship manager to lure you into opening a Demat account, you will be paying more fees. The bank already has massive overheads to keep its banking operations going; by getting you to open a Demat account, they are passing those costs to you.
Another way to look at the situation is to see what happens at a brokerage firm. It doesn’t have banking needs to take care of; therefore, its costs are lower. Its primary focus is to open up Demat and Trading accounts and serve the customers. When you think of the situation from that angle, it becomes a no brainer.
So this brings us to the next question: what broker should you go with?
Costs, costs, costs
Many brokers charge fees for opening Demat accounts. Others (like Upstox) don’t. Many brokers charge you annual maintenance fees (AMC), and others don’t. And then certain brokers will charge Demat fees just for miscellaneous reasons, such as sending contract notes, providing advisory services, etc.
Go with a broker that charges none of the above. Upstox, for example, provides free Demat account opening and does not charge an AMC. The only charges it imposes, which are levied by CDSL, is Rs.13.50 per stock per day (Upstox does not earn a profit on the fee). In other words, go with a broker that isn’t looking to earn a profit by opening up a Demat account for you.
Finally, look for additional services that come with a Demat account. One example is margin against shares, which Upstox provides. You get to use your shares in your account as collateral to make other purchases. When it comes to ease of use, you want to make sure that it’s as smooth and easy as to buy and sell shares through your trading platform.
The bottom line
Unfortunately, many investors overlook these simple factors when it comes to opening and transacting through a Demat account. By keeping these factors in mind, it becomes a lot easier to figure out which broker to open a Demat account with.