What is a Depository? How Does a Depository Work? | HDFC securities

If you are an active stock market investor, you must have at some point heard the term depository. But have you ever wondered what exactly it means and what role does depositories play when you are trading in shares? Let us understand it in detail.
The word depository essentially means a place where something is deposited for storage. With reference to stock markets, a depository is an entity that holds all kinds of financial securities like shares, debentures, bonds, government securities, mutual fund units, etc. in a dematerialised form. In simple words, the way a bank holds your money electronically in a bank account and permits you to deposit/withdraw your funds, a depository holds your shares in an electronic/dematerialised format and allows their sale and purchase.
The Central Depository Services Ltd (CDSL) and National Securities Depository Ltd (NSDL) are the two main depositories functioning in India. Both depositories serve the same function of holding financial securities like shares, bonds in a Demat form and are regulated by the market Securities and Exchange Board of India (SEBI). NSDL is the oldest depository in the country. It commenced operations in 1996. It was the first depository to provide trading services in electronic format. The central depository started operations in Mumbai in 1999.
How do depositories work?
When you open a demat account, it is the depository where your shares are held. If you buy shares, they are credited to your demat account by the depository and if you sell them, they are debited from your demat account. Therefore, it is the depository that is transferring shares among various demat accounts and settling trades. When the ownership of a security is transferred from the seller to the buyer, the security must go through a settlement process. In India, a T+2 settlement cycle is usually followed in equity markets.
What is a T+1 settlement?

A T+1 settlement would mean that trades will be settled a day after the transaction, or buyers will receive the shares in their demat account the very next day of placing the order.

What is a T+2 settlement?

T+2 is an abbreviation for Trade plus 2 days. T refers to the trading day when the order was placed. A T+2 settlement cycle means it takes two days for depositories to transfer the shares to the demat account of the buyer after the trade order was placed.

However, as an investor, don’t get bothered about choosing a particular depository for your demat account as it is not your call. It depends on whether your DP is registered with NSDL or CDSL. And the choice of depositor won’t make any difference to your trades, trading prices, or the performance of your portfolio. So, when opening a new demat account, just focus on comparing various DPs by looking at the services being provided by them, and the fees being charged for that. And make a wise decision accordingly.

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