For the past few years, a lot of young Indians are showing interest in starting their trading journey in the Indian stock market, looking to ensure financial stability by diversifying portfolios.
Trading in stocks doesn’t need a degree but requires a thorough knowledge about the market before starting investment journey.
What is a demat account?
A demat account acts like a digital wallet for your stocks and investments, which ensures security and convenient management of your securities through your computer or mobile device, eliminating the need for physical paper certificates.
Also read: How to open a joint demat account? Here’s a step-by-step guide
In order to maximise the advantages of demat accounts, new investors need to carefully choose the right depository participant or stockbroker. The brokerage company functions as the investors’ key ally, offering guidance and enabling all their trading and investment endeavors, thereby assuming a pivotal role throughout their financial market journey.
As new investors increasingly show interest in the market, there has been a corresponding increase in instances of fraud related to demat accounts.
Key risks involved while opening a demat account for trading:
Highly volatile and risky trade
The stock markets exhibit volatility and a high level of dynamism, reflecting the technologically advanced and interconnected nature of our world. Any significant occurrence, regardless of its location, has the potential to influence the value of the stocks in your portfolio. Moreover, stock prices experience fluctuations multiple times throughout a single trading session. Volatility reaches its zenith on certain days, particularly during significant events such as the Budget, elections, and the release of key announcements like GDP figures and earnings reports from major corporations.
Also read: How to open a demat account online? Here’s a comprehensive step-by-step guide
Risk of fraud
With an expanding pool of investors and service providers, the risk of fraud and mismanagement is increasing. Concerns about the safety of demat accounts have been raised due to instances of malpractices, including unauthorised selling of clients’ holdings by stockbrokers.
Stock market regulators and brokerage firms are working on ways to devise innovative methods to prevent fraud.
Risk of churning portfolio often
Given the easy accessibility of your demat account online, accessible on any Internet-enabled device, there might be a temptation to engage in frequent trading. The convenience of trading from any location could lead to a pattern of continuous buying and selling, potentially impacting your wealth accumulation objectives, particularly if you have specific financial goals to achieve. Additionally, you might find yourself drawn towards short-term trading instead of prioritising long-term investment strategies.
Risk of improper transactions
From time to time, it’s advisable to review your demat account for any potential irregular transactions. Undoubtedly, one of the downsides of owning a demat account is the constant need to remain vigilant against such challenges. As an investor holding a demat account, it is essential to maintain vigilance and regularly monitor the activities of your chosen stockbroker.
Also read: Demat Account: 10 crucial things you should keep in mind as a beginner
FAQs
How does monitoring help mitigate risks in demat accounts?
Regular surveillance of account actions helps in identifying any questionable transactions or unauthorised entry attempts, facilitating swift intervention to mitigate potential risks.
Is nomination mandatory for a demat account?
According to SEBI regulations, it is obligatory to designate individuals for a demat account. In the event that the account holder(s) opt not to nominate, they are required to furnish a written and signed declaration affirming their decision.
Do I need to maintain a minimum balance of securities in my demat account?
No, there is no requirement for maintaining a minimum balance in your demat account as mandated by the depositories (NSDL and CDSL). You are free to keep a balance of zero in your demat account.
How many demat accounts can be opened with one PAN card?
Multiple demat accounts can be opened using a single PAN card, but each demat account should be opened with a different broker. Consequently, it is possible to maintain multiple demat accounts, each linked to a different broker, while utilising the same PAN card.
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Published: 30 Apr 2024, 08:01 PM IST