To invest in the stock market every investor or trader must open a demat account. This account holds the shares and securities in an electronic form. By using the demat account, the trader or investor can purchase or sell the shares or securities in the Indian financial market.
In order to open a demat account, the investor needs to approach the depository participant or the broker. One thing which many people do not know is that demat account opening is not possible without a depository. In this article, we will learn what is a depository and its other important details.
Let us first learn the meaning of term depository.
What is Depository?
A depository is a place where all your shares and securities are held in dematerialised form i.e. electronic form. The depository maintains and facilitates the trading of financial securities in dematerialised form. Holding securities in the depository account is just like holding your money in the bank account. In India, there are two depositories that are registered with Securities and Exchange Board of India (SEBI);
- National Securities Depository Limited (NSDL) which is promoted by the National Stock Exchange, Industrial Development Bank of India, Unit Trust of India, etc.
- Central Depository Services (India) Limited (CDSL) which is promoted by the Bombay Stock Exchange Bombay Stock Exchange, State Bank of India, Bank of India, etc.
Let us now learn about the functions of a depository.
Functions of Depository
The depository acts as the middle man between the companies issuing shares and shareholders. The companies issue shares with the help of agents of the depositories that are known as depository participants or DPs. The DPs can be any entity which fulfils the norms of SEBI like financial institutions, broker, banks, etc. The DPs are responsible for the transfer of shares or securities from the depository to the investors. Upon the completion of the transfer, the depository sends a confirmation message to the investor regarding the same.
Let us now learn how depository works.
How Depository Works?
The depository has many agents in the form of financial institutions, broker, banks, etc. through which they communicate with the client. These agents are termed as depository participants or DPs. To avail the facilities provided by the depository, the client or investor would need to open an account known as the demat account with any of the depository participants.
After learning about the functions and working of the depository, it is important to learn why a depository is required.
Why Depository is Required?
The depository has eliminated all the risks that were previously involved in holding of financial securities in physical form. By digitalizing the whole transaction process, the depositories have mitigated the risks involved in share transfers and their ownerships. Also, the risks like loss of share certificate due to damage, theft or any other reason have been completely eliminated. The depository also gives confidence to the investors to invest more money in the financial markets because there are fewer chances of frauds or delays in the transactions. The introduction of demat account by depositories has not only reduced the paperwork but has also fastened the process of shares transfer. Now with demat account, a trader can carry out numerous transactions in few seconds.
Both, depository and depository participant are registered and regulated by the Securities and Exchange Board of India. This assures the investors regarding their investments made through the depository participants or brokers. If you are new to the market or looking to open a demat account, you can consider Kotak Securities. They are the leading and reputed broker of the country. They provide premium services at the most competitive rates.