What is a Depository?
- 12 Apr 2024
- By: BlinkX Research Team
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A depository is a financial institution that holds and facilitates the transfer of securities in electronic form, known as a demat account. Depository in stock market plays an important role by serving as a centralised custodian of dematerialised securities, including stocks, bonds, and mutual funds. The depository meaning refers to an entity that allows investors to store their financial assets in a secure and convenient manner. This enables smooth buying, selling, and transferring of securities without the need for physical certificates. Understanding the concept of a depository is essential for anyone interested in participating in the stock market or investing in financial instruments. This article will cover all the aspects related to the depository, understand the role of depositories, their types, benefits and more.
What is a Depository in the Stock Market?
Understanding what is depository in stock market is crucial for investors seeking to safeguard their securities and streamline the process of trading and settlement. A depository is a financial company that maintains financial securities in a dematerialised state. Here, transactions such as buying and selling shares happen without physically moving the assets. Special intermediaries called Depository Participants (DPs) enable investors to buy and sell securities through the depository.
The depository keeps investors' securities like stocks and mutual funds in an electronic form instead of physical certificates. This reduces paperwork and prevents the risk of physical certificates getting lost or stolen. It also makes purchasing and selling securities much easier. Apart from holding securities electronically, depositories provide other services such as keeping records of mutual fund units owned by investors, settling trade transactions, and handling corporate actions like dividend payments and bonus share issues.
Table of Content
- What is a Depository in the Stock Market?
- Benefits of Depository System
- What are Depository Charges?
- Types of Depository Systems in India
- How Does the Depository System Work?
- Functions of Depository
- Role of Depository in Financial Markets
Benefits of Depository System
The advantages of depository system is that they help investors perform trading activities well. They provide a safe and efficient way to hold and transfer financial securities electronically. The key benefits make investing more convenient, cost-effective, and accessible compared to dealing with physical certificate documents. Let’s understand the benefits of depository system in detail.
What are Depository Charges?
When investing in the stock market through a depository system, you may need to pay certain fees known as depository charges. These depository charges apply under different circumstances. One common situation where you would face these charges is when you buy or sell securities using your Demat (dematerialised) account. In such cases, your Depository Participant (DP) will charge you a fee. Before the charges reach you, the DPs themselves first have to pay fees directly to the depositories (NSDL or CDSL). The DPs then pass on these depository charges to you as their client.
Types of Depository Systems in India
Central Depository Services Limited (CDSL) and National Securities Depository Limited (NSDL) are two different types of depository systems. Let’s understand more about these depository systems.
How Does the Depository System Work?
To buy or sell shares in the Indian stock market, an investor first needs to open a Demat (dematerialised) account. After opening this account, they can trade shares online. In India, two prominent depositories come into the picture: NSDL (National Securities Depository Limited) and CDSL (Central Depository Services Limited). These institutions operate under the regulatory purview of SEBI (Securities and Exchange Board of India), ensuring adherence to established protocols and standards within the financial domain.
These depositories appoint agents called Depository Participants (DPs) like banks, brokers, and financial institutions. DPs maintain investors' accounts and handle the settlement of trades. An investor's Demat account with a DP shows their shareholding in electronic form.
To open a Demat account, the investor fills out forms with the DP. When they buy shares, the DP credits that number of shares to the investor's Demat account electronically. No physical share certificates are issued. Similarly, when shares are sold, the DP debits the shares from the Demat account.
The Demat account holder, being the real owner of the securities, is known as the beneficial owner. All buying, selling or transferring happens by making entries directly in these electronic Demat accounts without any physical movement of shares. Investors receive regular statements from the DPs showing their current holdings and transaction details.
Functions of Depository
The depository performs several functions. This includes the following:
Role of Depository in Financial Markets
Depository services are essential to the financial markets. It offers a secure and effective way to store and transfer assets, lowering the danger of physical certificates being lost or stolen. Additionally, this lowers the transaction costs related to the actual transfer of securities. The depository also encourages the financial markets' efficiency and openness. It gives investors access to real-time data on their stock ownership and trades, increasing transparency and lowering the possibility of fraud.
The depository also facilitates the integration of the financial markets. It allows investors to access securities markets across different regions and countries, which increases liquidity and diversifies investment opportunities.
Conclusion
The depository system has simplified the Indian stock market investment process. It guarantees transaction security and provides securities to investors whenever necessary. As a result, the stock market's digitization has decreased fraudulent trades. There are many stock market apps available for investors which allow them to access the trading space from anywhere in the world. However, it is suggested to conduct proper research and compare competitors before downloading an online trading app. This will help you to make informed decisions regarding all the aspects related to the trading world.