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

Understanding Depositories: The Backbone of Secure Stock Trading

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While
participating in the stock market, it is important to be aware of the various
aspects surrounding it and their respective features, including jargon. One
such useful term is depositories, which are financial entities that can store
your securities in an electronic or dematerialized form.

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.

Functions of a Depository Participant

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.

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:

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:

Particulars

NSDL

CDSL

Operating Stock Exchanges

NSE BSE

Promoters

Unit Trust of India, IDBI Bank Ltd., etc. 

HDFC Bank, LIC, SBI, Bank of India, etc.

No. of Registered DPs

281 622

Demat Account Number Format

IN + 14 Numeric Digits

16 Digit Account Number

Market Share

Higher market share in terms of Demat accounts

Lower market share in terms of Demat accounts

Disclaimer:
The above-mentioned figures are subject to change.

While NSDL and CDSL primarily
operate in NSE and BSE, respectively, they are permitted to utilize either of
the two depositories for the settlement and trading of securities.
Additionally, investors can transfer shares from NSDL to CDSL, and vice-versa,
which is known as an inter-depository transfer or transaction.

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.

https://thelogicalindian.com/h-upload/2023/09/29/500x300_233767-stock-market-66930601920.webp

Finance

2023-10-03 14:38:26.0

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

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