. A Demat account is a necessity for stock trading and investment in the Indian stock market. Originally introduced by the National Securities Depository Limited (NSDL) in 1996, a Demat account is a digital vault that holds securities in an electronic form. Numerous value-added services, including stock lending and borrowing, have been launched as a result of the stock market’s expansion. This article will explore the pros and cons of using a Demat account for stock lending and borrowing. Check more on what is demat account?
What is Stock Lending and Borrowing?
Stock lending and borrowing are essentially the practice of loaning and borrowing securities, respectively. In this process, the borrower borrows securities from the lender, keeping cash or other collateral as security. The borrower has the option to sell these securities on the open market for a predetermined amount in the anticipation that the price will drop, enabling them to repurchase it and give the lender the returned securities. This practice is only allowed through a Demat account.
Pros of Stock Lending and Borrowing through Demat Account:
Additional Income Lenders can earn an extra income by lending their holdings, which can help improve their investment returns. Instead of having to pay cash for the assets they require for short-term investing, borrowers might profit by borrowing them.
When done correctly, short selling can be a profitable strategy to use when the stock market is struggling. Short selling, when done correctly, can be an effective way to make profits when the stock market is not doing well. Check more on what is demat account?
No Delivery-related Issues As the securities are held in electronic form. There is no risk of delivery or settlement-related issues that are prevalent in physical stock trading, where there can be delays and discrepancies with the transfer of the shares.
Easy Access to Security The process of borrowing securities for short-selling or hedging has become simpler and more streamlined, thanks to stock lending and borrowing through Demat accounts. This process makes it easier for investors to access the necessary securities. Check more on what is demat account?
Cons of Stock Lending and Borrowing through Demat Account:
Risk Risk is inherent in any type of investment, and stock lending and borrowing are no exception. H lender may suffer a loss if the borrower is unable to return the securities.
Legal Issues Legal issues can arise if the contract governing the stock lending and borrowing process fails to address any unforeseen situations. Check more on what is demat account?
Operational Problems Technical glitches, system failures, or other operational problems can cause delays or issues in stock lending and borrowing.
Insufficient Liquidity Insufficient liquidity in the securities market can also impact the stock lending and borrowing process, as the lender may not find sufficient borrowers to lend their securities or vice versa.
Transaction Costs Stock lending and borrowing through Demat account attracts additional transaction costs, such as lending fees, borrowing fees, brokerage fees, and stamp duty, which can impact the overall returns on the investment.
