Since there are so many investors and only two depositories, they cannot contact these institutions directly. The concept of depository participants arose because of a perceived need for an intermediary. A depository participant can be an intermediary between traders, investors, and CDSL and NSDL. A depository is any location that functions like a bank, holding assets and processing transactions.
The difference is that a depository stores assets such as securities instead of storing money. The DP not only streamlines operations for stock exchanges but also gives investors and traders a wide range of trading options such as Trading and Demat Account. You can manage your assets effectively with the aid of a DP who acts as an agent for either the NSDL or the CDSL.
A stockbroker offers advice to investors as they choose which stocks to trade. They handle paperwork, collect, and send brokerage to the exchanges, buy, and sell securities on the client’s behalf, and perform other tasks. On the other hand, a DP enables you to store shares electronically rather than physically. All your shares’ records are kept up to date by the depository participants, who also facilitate the direct deposit of dividends into your account.
A DP provides a variety of services, including handling corporate actions, handling share pledges and unpledged, etc. Several brokers, such as ICICIdirect, act as DPs to settle shares. Your broker becomes a DP when you buy or sell stocks on a stock exchange. The importance of DPs in Demat Account opening is:
- Helps in the Opening Process: An account cannot be opened for a person directly by a depository. The person should take the help of a DP, like how you open a bank account if you cannot do so with the RBI.
- Preserves Records: After you have chosen a DP, they will provide you with all the forms required to open an account with the depository. The DP is responsible for keeping all records about the shares held by the depository on behalf of the investor.
- Facilitates Dematerialisation: The process of dematerialising involves transferring physical share certificates into electronic form, which is much simpler to maintain and available from anywhere in the world. The goal of dematerialisation is to remove the need for investors to hold physical share certificates while also allowing for seamless tracking and monitoring of holdings.
To engage in online trading, an investor must open a Demat and Trading Account with a DP.
Depository participants make money by charging their clients fees for services such as account opening, share transfer, and share pledging. Some might even add a yearly maintenance fee.