How to Safeguard Against Demat Account Fraud

How to Safeguard Against Demat Account Fraud

Demat account has been nothing short of a game changer in stock trading. Nowadays, it’s almost a prerequisite to have a demat account for buying and selling shares. Bygone are the days of trading physical securities that took days. Demat account is faster, efficient and hassle-free.

A demat account is simply an electronic depository of all securities such as bonds, equities and stock. It is analogous to a bank account for stocks. While demat account is definitely safer and not at all cumbersome like physical trading used to be, no safety is guaranteed unless the account holder himself follows all precautions to prevent demat fraud and remains vigilant about the possibility of unscrupulous ways to fleece money.

Demat accounts are opened with a depository participant which is registered with a centralized depository. It’s via the depository participant that the buying and selling takes place. Safeguard demat account by embracing an uncompromising attitude towards alertness, investigation, verification and cross-checking.

There’s always a cat-and-mice chase between the regulatory authorities and scamsters. Even the most robust system is not 100% immune to the possibility of a scam, malpractices or frauds. But through constant vigilance, awareness and following all basic security measures, they can be made negligible. The stock market authorities and the brokerage firms always devise newer and innovative ways to stave off fraudsters, however the account holder should also follow the basic steps to ensure that there’s no error on his part that may cost him heavily. Here are the ways to prevent demat fraud and safeguard demat account:

Maintain account record:

Just like you always ensure to check the digital passbook of your bank account, in case of any confusion or discrepancy, DP holding and transaction statement in demat account should be checked from time to time. Transaction statement gives you the full view of all the transactions that you did. If you are unable to access your transaction statement, you should contact your brokerage firm immediately. Checking account records frequently is as crucial as exploring market insights and market fluctuations. By regularly going through account details, the possibility of demat account fraud can be substantially reduced.

Keep essential documents safe:

Every demat account has a Debit Instruction Slip (DIS) booklet, which must be kept safely. When you transfer shares from one demat account to another, you are required to sign in the DIS. Hence, ensure to keep the DIS with utmost safety and protect it with a strong password. If you signed DIS gets into the hand of someone else, it can be misused. As the saying goes, better safe than sorry. Keep everything secure to make the possibility of demat account fraud negligible.

Brokerage scrutiny:

With the public enthusiasm for stock trading, the number of brokerage firms are increasing each day. However, before you opt for a brokerage firm its essential to do a thorough background check about the firm, its history, track record, reputation and market credibility. It’s also essential to find-out beforehand that the broker is not involved in any form in proprietary trading. If the firm is entangled into proprietary trading, then avoid opening an account, as it may be a case of conflict of interests on its part which would be detrimental to your interests. Proper verification of brokerage firms is vital to prevent demat fraud.

Be Alert and Vigilant always:

There are instances when people move overseas and totally forget about their demat account. This is a reckless behaviour and one that can make you susceptible to phishing or scams. If you are shifting base and have no intention to use the demat account for an indefinite time-period, it’s always safest to make an application to your depository participant to freeze the demat account till the time you request access again. A demat account should only be frozen when it would lie idle for a long time. One of the main benefits of freezing a demat account is that you will keep on receiving the dividends and bonus of your pre-existing investments, but no amount can be debited towards the purchase of new stocks. This way, no one can misuse the account if it’s frozen. There’s no alternative to vigilance when it comes to preventing demat account fraud.

Power of Attorney:

Since brokerage firms and individual investors do not have a fiduciary relationship and according to the agreement terms, brokers can often access demat accounts with a power of attorney. The investor has to exercise caution about what power of attorney entails and how it can be breached. Instead of one-time signing off power of attorney, it’s safe to go for a limited purpose agreement rather than a general purpose one. A limited purpose power of attorney means that the brokerage will have to seek consent from you each time before any buying, selling or transferring on your behalf. Investors also reserve the right to cancel the limited purpose power of attorney without any prior notice if there are no pending dues that he has to settle.

Spot irregularities:

Always track for any irregularities in your demat account and get them rectified at the earliest. This is a pre-emptive step against any incipient fraud possibility. Regularly checking for irregularities is one sure-shot way to prevent demat fraud.

Strong password:

Demat account comes with a unique password that has to be kept secured. You can change the password as well. Choose a strong password and not a generic one that’s easy to guess. Also avoid accessing demat accounts on public Wifi and other untrustworthy networks.

SMS facility:

Most brokerage firms have the facility of real-time SMS notification whenever a transaction takes place on your account. It’s important to opt for it as you will remain updated about your account and in case of any overcharge or discrepancy, you can spot it and ask for it to be fixed before it gets too late.

Check share credit time:

Usually, the stocks that you purchased are reflected in your demat account within 2-3 days. If it’s taking more than this, inquire with your brokerage firm. If the brokerage firm asks you to let the shares lie in brokers account for an extended period in lieu of some potential benefits, avoid the situation and ask for complete transparency.

In the Nutshell:

Security and alertness is a must in case of any financial transaction. The possibility of most demat frauds can be nullified just by rigorously following simple steps and raising a red flag at the slightest whiff of suspicion. Thwart the possibility of a demat account fraud by regularly checking account updates, keeping crucial documents safe and verifying the trustworthiness of the broker.