Understanding A Depository: How Do They Benefit The Financial Market?

These institutions provide safety and administration services for investors’ securities. They also help provide liquidity to the stock markets, invest in multiple securities, and lend to individuals, among others.

Find out more about the types of depository, and how they immensely contribute to the financial market.

Depository Participants

All depositories also feature their own Depository Participants (DPs), who act as their agents and conduct transactions on their behalf. These help investors open Demat accounts and manage their assets securely and efficiently.

DPs can either be banks, NBFCs, stockbrokers, or organizations authorized by the Securities and Exchange Board of India (SEBI). In return for their services, DPs usually charge a Demat account fee and transaction fees. Investors will also be able to view their Demat account holding statement on the respective DP’s website.

The ideal way to go about choosing the best DP for your investment requirements is to compare their features and services, along with the various charges/fees. Some may even feature hidden charges, so it is recommended to have a look at all documents to ensure a smooth account opening process.

Here are the basic functions of a depository in the stock market:

• Risk Reduction: Before depositories and Demat accounts, investors were required to purchase physical copies of share certificates and hold them. Now, securities can be stored in a dematerialized form, which helps bring down the risks of loss, theft, and forgery of documents while transferring them.

• Links Companies to Investors: Depositories can serve as a link between investors and companies since they issue financial securities through DPs, and help create Demat accounts, among others. Investors can also utilize a Demat account holding statement to get a detailed insight into the shares held by them.
  
  

Additionally, depositories keep investors aware of matters such as transfer in ownership, corporate action, periodic holding of investors, and more.

• Liquidity Creation in the Market: Investors can receive loans against their securities or mortgages by depositories, which allows them to buy other securities while paying interest. Depositories also lend securities to various businesses and institutions, which helps them earn more revenue.

• Cost Savings: By conducting trades digitally, investors can enjoy many cost-saving benefits such as no brokerage or courier charges, lower transaction costs, reduced paperwork, and much more.

• Investor Safety Provisions: Depositories frequently review and monitor several things to safeguard investors. These include routine inspections of a DP’s activities, ensuring end-to-end encryption of transactions, and taking up insurance policies to help cover investors’ losses due to omissions, errors, etc.

There are two central depositories available in India, namely National Securities Depository Limited (NSDL) and Central Depository Services Limited (CDSL). NSDL was established in 1996 under the Depositories Act, 1996 by the National Stock Exchange of India. Meanwhile, the CDSL was founded in 1999. Both are regulated by SEBI.

Some of the primary differences between the two are mentioned below:

Types of Depositories in India

There are two central depositories available in India, namely National Securities Depository Limited (NSDL) and Central Depository Services Limited (CDSL). NSDL was established in 1996 under the Depositories Act, 1996 by the National Stock Exchange of India. Meanwhile, the CDSL was founded in 1999. Both are regulated by SEBI.

Some of the primary differences between the two are mentioned below:

How do Depositories work?

To be able to trade in stocks, you will be required to open a Demat account, which is a service offered by the two types of depositories via their DPs. The purchased shares are credited to your Demat account, and the offloaded ones are debited from there

However, it is important to note that the shares and securities are actually held by the depositories, as Demat accounts are simply intermediaries. Depositories also help distribute companies’ dividends to their shareholders.

Firms can gather information on shareholders through them and initiate transfers between two accounts. This is a much easier process than having to manually transfer share certificates in the past.

Depositories have a high amount of significance in all stock markets due to the indispensable functions they carry and their overall benefits. Now that you have a much better idea about what depositories are and how they function, don’t wait any further and get started with investing, today.