A depository can be compared to a bank. A depository holds securities (like shares, debentures, bonds, Government Securities, units etc.) of investors in electronic form. Besides holding securities, a depository also provides services related to transactions in securities.
A depository is a facility such as a building, office or warehouse where something is deposited for storage or safeguarding. It can refer to an organization, bank or an institution that holds and assists in the trading of securities. The term can also refer to a depository institution that accepts currency deposits from customers.
BREAKING DOWN ‘Depository’
A depository institution provides financial services to personal and business customers. Deposits in the institution include securities such as stocks or bonds. The institution holds the securities in electronic form also known as book-entry form, or in dematerialized or paper format such as a physical certificate.
Transferring the ownership of shares from one investor’s account to another investor’s account when a trade is executed is one of the primary functions of a depository. This helps reduce the paperwork for executing a trade and speeds up the transfer process. Another function of a depository is it eliminates the risk of holding the securities in physical form such as theft, loss, fraud, damage or delay in deliveries.
Depository services also include checking and savings accounts, and the transfer of funds and electronic payments through online banking or debit cards. Customers give their money to a financial institution with the belief the company holds it and gives it back when the customer requests the money.
These institutions accept customers’ money and pay interest on the money over time. While holding the customers’ money, the institutions lend it to other people or businesses in the form of mortgages or business loans and generate more interest on the money than the interest paid to customers.
The three main types of depository institutions are credit unions, savings institutions and commercial banks. The main source of funding for these institutions is through deposits from customers. Customer deposits and accounts are FDIC insured up to certain limits.
Credit unions are nonprofit companies highly focused on customer services. Customers make deposits into a credit union account, which is similar to buying shares in that credit union. The credit union earnings are distributed in the form of dividends to every customer.
Savings institutions are for-profit companies also known as savings and loan institutions. These institutions focus primarily on consumer mortgage lending but may also offer credit cards and commercial loans. Customers deposit money into an account, which buys shares in the company. For example, during a fiscal year, a savings institution may approve 71,000 mortgage loans, 714 real estate loans, 340,000 credit cards and 252,000 auto and personal consumer loans while earning interest on all these products.
Commercial banks are for-profit companies and are the largest type of depository institutions. These banks offer a range of services to consumers and businesses such as checking accounts, consumer and commercial loans, credit cards and investment products. These institutions accept deposits and primarily use the deposits to offer mortgage loans, commercial loans and real estate loans.
In India, a Depository Participant (DP) is described as an agent of the depository. They are the intermediaries between the depository and the investors. The relationship between the DPs and the depository is governed by an agreement made between the two under the Depositories Act.