Depository: Definition, Types, Roles & Functions
A depository is an institution that allows you to store your financial assets safely. So, a place where your assets can get deposited. A bank or financial institution can be an example of a Depository. These assets are held in a dematerialized manner. Hence, you don’t have to worry about their safety.
A depository provider is used to deposit money and assets to transfer, invest, and lend. Thus, providing liquidity to the market. Upon request, it also makes depositories responsible for returning the assets in the same condition.
A depository can also be stockbrokers. The meaning of depository is that they help an investor open a Demat Account. With the Demat account, investors can avail themselves of all depository services.
Another definition is that A depository is a physical structure or warehouse where important valuables are stored.
It is also a financial institution that collects deposits from people and corporations and assists them in trading securities. So, instead of putting your money in a potentially unsafe area, a safe vault preserves it safe and secure. Some of the examples of depositories are Credit unions, commercial banks, retail banks, and thrift institutions.
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How a Depository Works?
The majority of a depository’s funding comes from consumer deposits. Direct deposits, cash deposits through an ATM, electronic transfers from other banks, and check deposits are all the following options. If the institution fails, deposits are federally insured, which means you’ll receive your money back, up to a specific amount.
If you keep your money in a bank, it is protected by the Federal Deposit Insurance Corporation (FDIC). If you use a credit union, you are protected by the National Credit Union Administration (NCUA).
These will help you to increase the speed of your financial transaction and make your trade safe. A stockbroker is the only option that will help you not just to trade but provide a better option to grow yourself and also increase your knowledge in stock trading. With the online broker service, the price of each transaction becomes much less affordable for any trader. You can trade in any volume irrespective of its cost or number. Even in a small investment you can make a good return. The crucial thing about Demat account is that it is developing every day. So to be a better trader or investor you need to open a Demat account.
As a depository customer, you can make demand deposits and withdraw your money whenever you choose. For instance, one can deposit funds into their depository accounts via direct deposit, an ATM, or a check made out to them at their local bank branch. You can also withdraw funds from the depository at any time by using an ATM, wire transfer, or going into the bank in person.
Depositories are required by law to hold a certain amount of money in their vault at all times. If the depository makes too many loans or too many withdrawals at once, it may be forced to borrow money from other banks or the Federal Reserve to meet the legal requirements.
What do these depositories offer?
They offer the following things:
- Account maintenance for Demat accounts.
- Dematerialization and rematerialization
- Trade Settlement
- Market liquidity
- Transfers of shares
- Transfers of the market and off-market
- Remove the risk of owning a physical asset
- Assure safekeeping
- Nomination/transmission
Roles and Functions of a Depository
You must have understood Depository meaning. All you need to understand is its roles and functions. Depository services provide benefits such as:
Serves as a Mediator
Depository Participants (DPs) are the public companies responsible for issuing securities. Depositories ensure transactions are done efficiently. In addition, DPs maintain the investor’s data and transfer securities according to the information provided by depositories.
Create Liquidity in the Market
Depositories maintain the flow of funds. They offer loans against securities held by investors. This liquidity created by a broker is called a margin. In addition, depositories can lend securities to other investors or businesses, further maintaining liquidity.
The investors earn interest on their deposits. In addition, the broker can lend these securities in mortgages or loans.
Eliminates the Risk and Hassle of Owning Securities Physically
There is a benefit to securities in electronic form through a depository. It has less risk associated in comparison to keeping physical financial securities.
These securities are not transferred manually, eliminating the risk of theft or scam.
Financial institutions have the option of time and demand deposit accounts for investors to deposit their money, stocks, or bonds. A time deposit has a specific time of maturity and is an interest-bearing account. On the other hand, a demand deposit can be a checking or savings account holding its funds until the investor withdraws them. These assets are kept either in electronic forms known as book-entry forms or in paper forms as a paper certificate.
Reduced Paperwork with Easy Transfer
Due to electronic deposits and transfers, the whole process has become easier with less paperwork. There is no hassle in carrying out the manual depositing or transferring your funds. It has also made the entire process a lot quicker and more efficient.
Types of Depositories
Under the Depository Act of 1996, there are two depositories in India. Securities and Exchange Board of India (SEBI) is the governing body regulating these depositories’ functioning. These depositories are –
- National Securities Depository Limited (NSDL) under the National Stock Exchange (NSE), Industrial Development Bank of India, and Unit Trust of India in 1996.
- Central Depository Services Limited (CDSL), under the Bombay Stock Exchange (BSE), State Bank of India, and the Bank of India in 1999.
Both these Depositories, NSDL and CDSL, provide facilities to store share certificates and other securities. In addition, they provide services across India through Depository Participants (DPs).
There are three types of Depository institutions maintained by the customer’s deposits. The Federal Deposit Insurance Corporation (FDIC) manages these deposits and other accounts up to certain limits. A depository’s type determines which agency is responsible for looking after it. The three main types of depositories are —
- Credit Unions
- Savings Institutions
- Commercial Banks
Credit Unions
Credit unions are those non-profit organizations owned by members of a group who get the profits earned by the organization. The members have thrift credit union accounts where they make deposits. These are very focused on customer services who partly also own the organization.
The earnings or profits of the company get paid to the customers/members as dividends. Otherwise, they get just reinvested into the organization. Also, being a non-profit institution, credit unions have no federal or state tax making the interest rate on loans lower.
Savings Institutions
Banks serve local communities as savings and loan institutions. Here, a local can deposit money and offer a loan to credit cards. These institutions are for-profit companies and focus mainly on mortgage lending. These can be set up as financial cooperatives, allowing depositors to share ownership.
Commercial Banks
These are the most significant types of broker services owned by private investors. They offer checking accounts, consumer and commercial loans, credit cards, and investment products. Being for-profit organizations, the range of the services provided by commercial banks depends on the bank’s size and funding.
The smaller banks are confined to consumer banking, small loans, superficial deposits, banking for small-business, and other services. On the contrary, larger banks offer almost all services with a wide range of foreign exchange-related services, money management, and investment banking facilities. These services are diverse and most helpful among all security vault institutions.
Benefits of a Depository
Depositories offer numerous benefits to investors and the overall financial market ecosystem. Some of the key advantages of utilizing a depository include:
Ease of Transfer: The simplicity of transferring securities is one of a depository’s main advantages. Depositories enable the smooth electronic transfer of securities from the seller’s account to the buyer’s account in place of physical share certificates, which can be difficult and time-consuming to transfer. This expedites the transaction process while lowering the possibility of mistakes and physical certificate loss.
Safekeeping of Securities: When keeping assets for investors, depositories take on the role of custodians. Investors can avoid having to personally protect and maintain their holdings by trusting a depository with their securities. This lowers the possibility of security being stolen, damaged, or lost, giving investors peace of mind.
Efficiency and Cost Savings: The efficiency of the securities market is considerably increased by the usage of depositories. Depositories expedite the purchasing, selling, and transferring of securities by doing away with the requirement for physical transportation and authentication of the securities. As a result, market participants get quicker transaction settlement times, less paperwork, and cheaper operational expenses.
Enhanced Liquidity: Depositories are essential for increasing market liquidity. They provide margin facilities that enable investors to pledge their securities as security against loans or mortgages. This provides liquidity and flexibility for investors’ investing plans by allowing them to swiftly access cash without having to sell their shares.
Investor Services: Investors can take use of a number of depositories’ value-added services. Electronic holding statements, frequent information on company activities (such dividends, bonuses, and rights issues), and assistance with the investor’s involvement in these actions are just a few of the services offered. Investors have accessible internet access to depositories via which they may examine and manage their holdings.
Global Access and Convenience: Depositories have made it simple for investors to access and trade securities from any location in the globe. Investors can invest in exchange-traded funds (ETFs), take part in IPOs, and conduct massive trading operations thanks to depositories. Investors may diversify their portfolios and take advantage of international investment possibilities thanks to this ease of access and convenience on a global scale.
Depository vs. Repository
Depositories are financial institutions that hold financial assets such as cash and securities. A repository, such as a library, is where intellectual assets such as data, files, and knowledge are stored. There is a major difference between the meaning of a depository and a repository. A repository is a place where people keep things safe, but this is not limited to securities; this can also be for abstract things, like knowledge or ideas. So, for example, a document with data for students’ marks can be called a Repository of school records.
Depository vs. Non-Depository
Depository institutions are mainly concerned with their clients’ demand deposits. Some of the most frequent types are credit unions, retail banks, and thrift banks. Non-depository institutions, on the other hand, do not take demand deposits. Instead, they often work as middlemen, acquiring funds and then redistributing them to others. Brokerages and insurance businesses are some examples.
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Conclusion
A Depository means an institution that works for the investors and manages Depository Participants. They open Demat and Trading accounts and provide other helpful information for investors. In addition, they make sure that you have good experience in trading your securities.
Frequently Asked Questions (FAQs)
Depositories form the primary institution in providing investors and traders with Demat Accounts. The two main Depositories – NSDL and CDSL are responsible for a safe and secure holding of assets, such as stocks, bonds, mutual funds, etc. Depositories also assist Depository Participants with the opening and managing of Demat Accounts.
They hold the securities in a dematerialized form and use it further to invest, transfer and lend funds maintaining liquidity in the market. Investors and traders who open a Demat account to invest in the stock market are indirectly interacting with the depository for their trading needs and requirements.
There are two Depositories in India — NSDL and CDSL. These act as institutions responsible for storing and managing assets and securities deposited by investors and traders. They are in direct contact with all the Depository Participants and hence help and assist them in opening Demat Accounts. The depositories maintain the requirements and regulations of Demat accounts. They maintain their liquidity by storing, transferring, and lending funds, assets, and securities among different investors.
Any institution or place responsible for storing or safeguarding the deposited assets can be called a Depository. In the case of securities, these Depositories store the assets deposited in a Demat Account. There are two main Depositories in India – NSDL, and CDS.
Depositories are responsible for many activities in the transactions and trading of shares and securities through a Demat account. These depositories manage and control different Depository Participants. They ensure that all the transactions and transfers are happening correctly. They also help open Demat Accounts, and stores offer the shares and securities that investors deposit in these Demat accounts. They maintain the market’s liquidity by transferring and lending the stored funds.
A Depository Participant (DP) is an entity, such as a bank or a brokerage firm, registered with a depository to offer depository services to investors.
An Indian Depository Receipt (IDR) is a financial instrument issued by an Indian depository against the underlying equity shares of a foreign company, enabling Indian investors to invest in foreign companies.
In India, there are two main depositories: The National Securities Depository Limited (NSDL) and the Central Depository Services Limited (CDSL).