Dematerialisation has converted share investments into an electronic form. In the olden days, holding a share unit as an investment entailed holding a physical share certificate issued by the company. Transfer of this share was only possible after the physical document was also transferred from the seller to the buyer. The certificates in paper form made transfers and holding of shares as investments a tedious affair.
The Depositories Act of 1996, listed the guidelines for formation of ‘depositories’ to enable the smooth transfer of securities of publicly listed companies. This Act also changed certain provisions of the SEBI Act 1992, Companies Act 1956 and Income Tax Act 1961. Depository participants basically changed physical share certificates into an electronic format. NSDL (National Securities Depository Limited) and CDSL (Central Depository Services Limited) are the two major depositories in India.
A demat account allows share investors to hold shares purchased in an electronic form. Demat accounts have removed the hassles that existed in case of holding share units in a physical form. Dematerialisation involves a shift to computerisation and digital infrastructure. With dematerialisation, trading has become lucid for the average retail investor.
However, the shift to digital requires certain security measures that should be taken to prevent data theft, or misuse of data of the investors. Cyber hacking and invasion of privacy are real threats in today’s times. Here are some ways by which digital demat accounts of investors can be secured, by improved security mechanisms:
- Stick to one computer: Trading from the demat account should ideally be done only from a single system. In case the account is accessed from different terminals, cyber security can be under a threat. Incidents like power failure, or incorrect log off can create unnecessary trouble for the investor of shares like data theft and misuse of stock data logged in by the brokers or investors.
- Complex passwords: It is important to form complex passwords, to prevent breach of data in the demat account. The demat account of an investor contains vital data regarding a history of trades made, prices of trades and companies invested in. A strong password can aid in the protection of this private data of an investor against hackers.
- Update security regularly: Passwords and other security features must be updated regularly. In case the same password is retained for a long time, hackers can mine related information and hack into the demat account by guessing the password. Security mechanisms must be regularly updated and passwords should be changed frequently, preferably every month or so for active traders.
- Trusted brokers: Investors must forge relationships with brokers and dealers, who can be entrusted the responsibility of managing sensitive data and private information. Agreements must also be entered into with these brokers to ensure privacy and confidentiality of data. A long-term relationship is essential between a broker and investor.
- Log off: After a trading session, investors must log off or sign out of the demat account. In case the account is not signed out of, it can lead to data theft and malicious intrusion in the account. Logging off and changing passwords ensures basic data security. A logged on account can be hacked into and vital data regarding trades and prices can be stolen.
- Hardware and software updates: Investors must ensure that hardware and software updates are regularly undertaken, to prevent crashing of the system. Updates help the computer systems to work smoothly and without any glitches. Software developers bring updates on a frequent basis which have additional security features as well.
- Install antivirus programs: Anti spyware, anti-virus and antimalware programs are specialised software which help the system to sustain external shocks and hacker attacks. These programs are designed in a way to increase security systems and protect vital data. Investors must install antivirus software to protect demat account data from malicious access and usage.
Digitisation and computerisation have eased the trading procedure for retail investors. Prior to the demat era, investors had to handle transfer and holding of physical share certificates- which were a sign of ownership of the shares held. Dematerialisation has converted the shares to a digital or electronic form easing trading and investments.
Security of electronic shares can be compromised in various ways such as data theft, malicious use of private data, virus attacks on the systems etc. Digital demat accounts must be carefully protected against misuse by installing anti virus programs, performing regular updates on both hardware and software, and logging off the account after trading. Passwords must be set at complex levels and also updated regularly to prevent loss of sensitive information. Trading must also be secured by entrusting the trades to reliable brokers and intermediaries, in case the investor is not handling the account himself. Security is an important issue that can prevent losses for investors.
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