Common Mistakes to avoid when opening a Demat account online

In 1996, SEBI eased the hassle of trading and introduced an online demat account, allowing individual retail investors to trade directly with the help of a mediator, but online. The awareness of investing money is growing rapidly. Call It global influence or influencers' impact, more and more people are drawn towards investing in financial products. In alone FY23, nearly 5 crores (24.8 million) of Demat accounts were opened. That is around a 25% increase from the last FY.

A Demat account is required to hold and manage securities online. It is generally accompanied by a trading account required to invest in the stock market, bonds, IPOs and other financial products. In today's digital age, opening a Demat account online has also become a streamlined and convenient process. Investors are required to complete the EKyc and verify the account. The process is thorough but quick at the same time. Often the account is verified with a one-time password and does not take several days to activate. However, as easy as the process seems, there are a few common yet avoidable mistakes investors make before going through with the process.

In this article, we'll understand the most common mistakes people can avoid before choosing a demat account. Let's dive in.

Understanding how demat account works

A Demat account is held with a depository participant (DP). In India, there are two depositories; NSDL (National Securities Depository Limited) and CDSL (Central Depository Services Limited). However, investors need not be concerned about these. Which depositories you'd signed up with would depend upon the brokerage firm the demat account is associated with. A broker and DP are often from the same company.

There are two types of brokerage firms; discount and service brokers. The difference between the two lies in the range of products an investor can trade into. A service broker provides investing options to the stock market, IPOs, mutual funds and insurance; whereas a discount broker carries out the investing instructions and offers equity and derivative trading.

Now, let's understand the process. When a stock/security is purchased, it is credited to the demat account electronically. You can easily track your holdings and also sell securities hassle-free from your demat account. When an account is opened, investors are required to add money to the account manually. This is how demat account works.

Common mistakes to avoid before opening the demat account online-

Mistake 1 - Not Reading the Account Opening Form Thoroughly

Not reading the fine print is something everyone is guilty of. However, reading the instructions, clauses, restrictions and process is crucial when opening a demat account online. It is important to carefully read all details filled in the account opening form. All the Ifs and buts, terms and conditions are explained in the form of disclosure. Ensure your personal details like name, contact information, PAN, etc. are correctly entered. Cross-check nominee details and make sure the form is duly signed by all account holders in case of joint accounts. If any information is entered incorrectly, it can lead to problems later during transactions. Verify that the chosen DP, account type, mode of holding and other fields is accurately filled as per your requirements.

Mistake 2 - Not Paying Attention to Auto Debit and POA clauses

Auto concerned or auto debit instructions is a facility in a Demat account to allow investors to invest automatically based on preset instructions. It acts just like a SIP. After the proper set-up, a certain amount of money will be debited from the demat account every month/quarter and invested in the desired shares regularly. It is a convenient facility to meet investing goals, however, not understanding the terms and conditions is important. Be sure to opt for or reject this based on requirements to avoid unnecessary charges.

POA authorizes a broker to invest on behalf of the account holder without seeking further approval for each transaction. This facility is useful if you are overly occupied or become incapacitated. However, any decision not taken by the account holder directly might concern a few people. Choices and frequency of investment can end up causing one to lose money at times. It's a serious document. Be judicious in enabling these options - understand the risks before signing up.

Mistake 3 - Not Opting for Multilateral Trading Facility

What is a multilateral trading facility (MTF)? It is a trading system that enables account holders to trade between multiple parties. It's an alternative to traditional exchanges. MTFs have fewer restrictions surrounding the admittance of financial instruments for trading, allowing participants to exchange more exotic assets and over-the-counter (OTC) products. Not all brokerage firms offer this facility. Checking before opening an account would reduce unnecessary hassle.

Mistake 4- Not opting for Margin Trading facility

Margin trading facility allows investors to make bigger orders by paying only a fraction of the total price. This facility needs to be specifically opted for in the account opening form, or else it won't get activated by default. Some brokerage firms facilitate investors to purchase shares worth ten times their investments. The remaining amount is borrowed by the broker. This way, investors can magnify profits. This facility is suitable for investors in the beginning with less money or if the plan is to trade in derivatives like futures & options, which require margin funding. Ensuring to have enabled MTF in the form would prevent issues later. A Demat account should also be linked with a trading account.

Mistake 5 - Lack of Attention to Regulatory Charges and Transaction Fees

A Demat account has different kind of charges, such as account opening fees, annual maintenance charges, settlement fees for purchase/sale of securities, custody fees, and so on. There are different transactional charges for different opted facilities or trading in different products and securities. A lack of awareness about the costs deducted from the account subsequently would discourage investing frequency, and could also result in less anticipated profit. Keep an eye out for any hidden costs not clearly specified upfront as well.

Mistake 6 - Inadequate Knowledge of Account Limitations

Understanding any limitations or restrictions applicable to your demat account is the first step in deciding to go to a brokerage firm. Certain types of accounts prohibit trading in speculative securities or have limits on the number of transactions per month. Not being aware of such restrictions can pose problems later when you try to transact beyond permissible limits. Read all provided documentation carefully.

A Demat account opens a wide array of investing worlds for investors, however, as everything else comes with challenges. Avoiding common mistakes when opening your demat account and having complete clarity on how it works goes a long way in ensuring a smooth investing and trading experience. Ensure the investing patterns and needs beforehand. This will help investors finalize the type of demat account and the facilities required to meet those goals. Researching thoroughly about brokerage firms, types of needed demat accounts and restrictions and facilities that entail these would help in the longer run.

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