In recent years, the number of retail investors actively investing surged and has increased the stock market value by a large proportion. However, it becomes vital for investors to know how the stock market works in order to make the best use of it. The investor should know about the parties involved in a transaction that works behind the curtain. One such party is the depository.
A depository is an entity or an institution where the assets are securely held in dematerialised form. The depository is responsible for providing security and liquidity to the dematerialised assets it holds and also facilitates smoother transactions. Depositories interact with the customer (trader/Investor) through a Depository participant, also known as a StockBroker. The depository participants in India help you open a free Demat account to enable you to begin trading in the stock markets.
Types of Depository
The Depository Act of 1996 regulates a Depository’s operational and establishment aspects. SEBI regulates depository services. NSDL and CDSL are two major depositories in India.
- National Securities Depository Limited (NSDL) is backed and promoted by the National Stock Exchange, Industrial Development Bank of India and Unit Trust of India.
- Central Depository Services Limited (CDSL) is promoted by the Bombay Stock Exchange, State Bank of India and the Bank of India.
Also Read: Where to Open a Demat Account?
Benefits Of a Depository
Depositories are not just a place to store your shares or dematerialised assets securely, but they have multiple benefits too, such as
1> Holding securities on behalf and for an Investor
Primarily depositories function as a guardian to safeguard the dematerialised Securities on behalf of the investors. It makes the investors less worried about holding the securities by themselves and spending precious time maintaining them.
2> Instant Transfer of Securities
Depositories allow the transfer of securities during a trade almost instantly.
3> No Stamp duty
Unlike earlier, there is no requirement for any stamp duty when you transfer securities with a depository.
4> Reduction in transaction costs
Depositories reduce your transaction costs to a greater extent
5> Allows a convenient method to consolidate your funds
Allows you to hold all investments such as equity, debt or government securities in a single account.
How do Depositories Work?
As mandated by SEBI, you need a Demat account to be able to trade in the Stock markets. The Demat account works like your bank account. They get credited to or debited from your Demat account whenever you buy or sell shares.
Whenever you open your free Demat account with your Depository Participant, they provide you with a trading platform through which you trade.
How does this work?
Let’s say you buy ten shares of HCL and place a market order for ten shares of HCL using the trading platform. You will receive these shares in T+2 days, where T is the trading day. The ownership of these shares is then transferred to you by NSDL or CDSL, depending upon the depository your account is opened with.
The price of shares rises sometime later, and you wish to sell the HCL shares you bought. You will again have to place a sell order through your trading platform. In the backend of the platform and the whole mechanism, these shares will be debited from your Demat account, and in T+2 days the equivalent amount will be credited to your account through the settlement process. These shares will be transferred to the next owner or the buyer by the NSDL Or CDSL, the depository which opened your Demat Account.