Last Updated on December 11, 2023 by BFSLTeam BFSLTeam
In recent years, there has been an unprecedented surge in the number of retail investors participating in the stock market. This influx of investors has significantly impacted stock market volumes. However, for those new to the market, it’s crucial to comprehend key stock market concepts, including the role of depositories, amidst the myriad of financial jargon.
Table of Content
What Is Depository?
A depository meaning in stock market can be envisioned as a secure space where financial assets are stored for safekeeping. This secure space can take the form of a bank, financial institution, or any organisation dedicated to holding assets in a dematerialized (electronic) format. Depositories, often acting through Depository Participants (DPs), who are also known as stockbrokers, facilitate interactions with clients. In essence, a depository serves the vital functions of ensuring asset security, liquidity, and seamless transactions for investors.
Understanding the Role of Depositories in Stock Market
In financial terms, a depository refers to an entity responsible for holding financial securities in a dematerialized form. In the past, securities were issued and traded in physical paper form, necessitating manual record-keeping for their transfer. However, with technological advancements, securities are now stored electronically within a depository. This institution not only safeguards these securities but also maintains ownership records and facilitates their trading.
Types of Depositories in Stock Market
In India, the Depository Act of 1996 governs the establishment and operation of depositories, with SEBI (Securities and Exchange Board of India) regulating their functioning. Two prominent depositories operate in India:
1. National Securities Depository Limited (NSDL):
NSDL is promoted by key financial entities, including the National Stock Exchange (NSE), Industrial Development Bank of India (IDBI), and Unit Trust of India (UTI).
2. Central Depository Services Limited (CDSL):
CDSL, on the other hand, is promoted by significant players in the Indian financial landscape, such as the Bombay Stock Exchange (BSE), State Bank of India (SBI), and the Bank of India.
Benefits of Depositories in Stock Market
Depositories offer a range of advantages, including:
1. Ease of Transfer
- Holding Securities on Behalf of Investors: Depositories act as custodians, safeguarding securities on behalf of investors. This alleviates the need for investors to manage securities physically and oversee their maintenance.
2. Facilitating Transactions:
- Streamlined Transfer Process: A pivotal role of a depository is facilitating the transfer of securities between owners. When a trade is executed, the depository seamlessly transfers securities from the seller’s account to the buyer’s account electronically. This efficient process enhances transaction speed, accuracy, and reduces room for errors.
3. Additional Functions:
- Acting as an Information Link: Depositories function as intermediaries, informing investors about changes in ownership, their periodic holdings, corporate actions, and more. Similarly, companies rely on depositories to maintain accurate shareholding records based on the information provided.
- Creating Liquidity: Depositories extend liquidity to investors by offering mortgages or loans against securities held. This liquidity, also referred to as margin, can be utilised for purchasing other securities. Additionally, depositories lend securities to other institutions and businesses, generating revenue in the process.
- Global Accessibility: The advent of depositories has enabled investors to engage in high-volume investments from anywhere in the world. Investors can participate in Initial Public Offerings (IPOs), trade Exchange-Traded Funds (ETFs), and conduct large-scale trading activities with the convenience of a depository.
The Functioning of Depositories in India
In India, a Depository Participant (DP) plays the pivotal role of an intermediary, bridging the gap between investors and the depository.
To access depository services, an investor must open a Demat account, often through a demat account app. The process typically involves the following steps:
1. Visit the website of the chosen financial institution or use their mobile app.
2. Complete the online account opening form, providing basic details.
3. Verify your identity through a one-time password (OTP) received on your mobile number and email.
4. After OTP verification, fill out the online Account Opening Form.
5. A Relationship Manager will contact you for the necessary documentation.
6. Upon the completion of the documentation process and the receipt of forms at the Head Office, the account is typically opened within 24 hours.
Conclusion
In today’s financial landscape, transacting in listed securities without a Demat account, and by extension, a depository, is virtually impossible. The benefits they offer are indispensable, making it imperative for every investor to maintain a Demat account for their investment endeavours.
