The process of investing in the stock market today has become straightforward and hassle-free. If you have a smartphone with an internet connection then you open demat account, and you can start investing. This smooth investing process results from several entities that make up the stock market working in unison. This article will cover the entity called the depository. In this article, we understand the body and its role, which has helped enhance the investing process
What is a Depository?
By itself, a depository concerns an institution or facility that accepts and safeguards deposits. Those deposits could include currency, gold, valuables, or, in the case of the stock market, securities. So, a stock market depository can be considered a facility similar to a bank. However, instead of holding money, a depository holds securities and assets like stocks, mutual funds, exchange-traded funds (EFTs), and debt securities like corporate bonds. It does so by virtue of providing investors with a demat account. More on the topic of demat accounts later.
We have two major depositories in India—the NSDL and the CDSL. The National Securities Depository, abbreviated as NSDL, was the first depository in India. Established on 12th December 1996, it is also the largest depository. As of 2nd November 2022, the NSDL had 278 depository participants. The CDSL, founded in February 1999, is the other leading depository in India. The CDSL had 581 depository participants as of 2nd November 2022.
Demat Account
Individuals intrigued by the stock markets will surely stumble upon the term demat account. Do some research on the stock market, and you will see ads asking to open a demat account. In India, demat accounts are provided by the two depositories. We drew a comparison between depositories and banks earlier. You know that you can deposit and store money in the bank after opening a savings account. Likewise, you require a demat account provided by a depository to electronically hold all your stocks, securities, and other such investments. Learn More
Depository Participant
Now, in the case of a savings account, you can open one directly by approaching a bank. However, in the case of a demat account, as an ordinary investor, you cannot open one by going and knocking on the depositories’ doors. Instead, you open a demat account with an intermediary called the DP or depository participant. You can think of a DP as a branch of the depository. These DPs are stock brokers registered with at least the NSDL or CDSL. So, you can open a demat account by heading to a leading DP’s website.
Working of a Depository
You open a demat account with a DP, and then you can start investing in the stock market. So, suppose you invest in shares of Company B, the shares of Company B get credited to your demat account in two trading days. The depository with which your DP is registered does the backend work of transferring the ownership of those shares of Company B’s in your name. Likewise, if you sell Company B’s shares, the shares get debited from your demat account. The CDSL or NSDL then transfers ownership of those shares to the new owner. Read More
Besides the function mentioned above, depositories also provide dematerialization and rematerialisation services. The former involves the conversion of physical shares into dematerialized shares. In contrast, the latter refers to the conversion of dematerialized shares to a physical state. At the same time, the depositories also handle off-market transfers and inter-depository transactions. When a company issues dividends to its shareholders, the depositories transfer them to the shareholders’ accounts
Stock Trading Pre-Depository
Before the inception of depositories and the demat account, investors traded shares by trading physical share certificates. Now, the process of trading physical shares was cumbersome. That was because it involved the physical exchange and delivery of the certificates. At the same time, holding those certificates and keeping them well-protected was also a hassle. You would have to do your best to see that the shares are not damaged, or else they would lose their value. Moreover, the shares would often get damaged during transit, which was beyond your control. Lastly, maintaining a physical record was also inefficient, as any error in the books would be a roadblock for future trades.
Benefits of The Depository System
Now you know about the flaws of the trading system before the establishment of depositories. The introduction of the depositories paved the way for electronic trading and helped remove major deficiencies of the traditional system. For starters, it aided in the development of dematerialized shares that are resistant to physical damage and theft. Electronic trading has also drastically reduced the time required to settle a trade, making the transaction more efficient. Lastly, electronic trading has also resulted in the reduction of brokerage fees.
Conclusion
The depositories play an essential role that has helped simplify the process of investing while also making it efficient. Trades are settled quickly and in the most secure manner. You can also keep track of your investments and view the status of your portfolio at any time. Thanks to depositories, you can open a demat account, and invest in the stock market with a few clicks.
Benefits of The Depository System
Now you know about the flaws of the trading system before the establishment of depositories. The introduction of the depositories paved the way for electronic trading and helped remove major deficiencies of the traditional system. For starters, it aided in the development of dematerialized shares that are resistant to physical damage and theft. Electronic trading has also drastically reduced the time required to settle a trade, making the transaction more efficient. Lastly, electronic trading has also resulted in the reduction of brokerage fees.
