Depository System

DEPOSITORY SYSTEM

Important terms related to the stock exchange

1. Dematerialization: stocks are kept in electronic form instead of physical form (i.e. share certificates). It helps in overcoming the problem of theft, forgery, delays, misplaced certificates, and unnecessary paperwork.

Benefits of Demat Account

1. Reduces paperwork.
2.  Elimination of problems with the transfer of shares such as loss, theft and delay.
3. Exemption of stamp duty when the transfer of shares.
4. The concept of odd-lot stands abolished.
5. Increase liquidity through speedy settlement.
6. Attract foreign investors and promote foreign investment.

Working on the Demat System

1.  A depository participant (DP), either a bank, broker or financial services company, may be identified.
2.  An account opening form and documentation (PAN card details, photograph, and power of attorney) may be completed.
3.  The physical certificate is to be given to the DP along with a dematerialization request form.
4.  If shares are applied in a public offer, simple details of the DP and Demat accounts are to be given and the shares on allotment would automatically be credited to the DEMAT account.
5.  If shares are to be sold through a broker, the DP is to be instructed to debit the account with the number of shares.
6.  The broker then gives instructions to his DP for the delivery of the shares to the stock exchange.
7.  The brokers then receive payment and pay the person for the shares sold.
8.  All these transactions are to be completed within 2 days, i.e., delivery of shares and payment received from the buyer is on T+2 bases, settlement period.

Advantages of Electronic trading systems or screen-based trading has certain

1. Ensures Transparency
   • It allows participants to see the prices of all securities in the market while business is being transacted.
   • They are able to see the full market in real-time.
2. Increases Efficiency
   • It increases the efficiency of operations since there is a reduction in time, cost, and risk of error.
3. Improving the liquidity of the market
   • People from all over the country and even abroad who wish to participate in the stock market can brokers or members without knowing each other.
   • This system has enabled a large number of participants to trade with each other, thereby improving the liquidity of the market.
4. Single trading platform:-
   • A single trading platform has been provided as a business is transacted at the same time in all the trading centers.

Now, screen-based trading or online trading is the only way in which you can buy or sell shares.

Important terms

• Demutualization: Process that separates the trading rights of members or brokers in a stock exchange from its ownership and control.
• Depository: - Organisation that holds securities (like shares, debentures, bonds, government securities, mutual fund units, etc.) of investors in electronic forms through a registered Depository Participant. Two Depositories viz. National Securities Depository Limited   (NSDL) and Central Depository Services (India) Limited (CDSL) are registered with SEBI 
• Depository Participant: -agent of the depository through which it interfaces with the investor and provides depository services. Commercial banks, foreign banks operating in India with the approval of the Reserve Bank of India.

TRADING PROCEDURE

The procedure for the purchase and sale of securities in a stock exchange involves the following steps:

1. Selection of a Broker:
   • The first step is to select a broker who will buy/sell securities on behalf of the speculator/ investor.
   • The investor has to sign a broker-client agreement and a client registration form before placing an order to buy or sell securities.
   • He has also to provide certain other details and information such as PAN number (mandatory), Bank account details, Depository account details, etc.
   • The broker then opens a trading account in the name of the investor
2. Opening Demat Account With Depository:
   • The investor has to open a Demat account or beneficial owner‘(BO) account with a depository participant (DP) for holding and transferring securities in the Demat form.
   • He will also have to open a bank account for cash transactions in the securities market.
3. Placing the order:
   • The order can be communicated to the broker and should specify the securities to be bought or sold and the price range within which the order is to be executed.
   • The broker will then go ahead with the deal at the above-mentioned price or the best price available.
   • An order confirmation slip is issued to the investor by the broker. Only the securities of listed companies can be traded on the stock exchange.
4. Execution of order:-
   • The broker goes online and connects to the main stock exchange and matches the share and best price available.
5. Issuing a trade confirmation slip
   • When the shares can be bought or sold at the price mentioned, it will be communicated to the broker‘s terminal and the order will be executed electronically.
   • The broker will issue a trade confirmation slip to the investor.
6. Contract Note
   • After the trade has been executed, within 24 hours the broker issues a Contract Note.
   • A Unique Order Code number is assigned to each transaction and is printed on the contract note.
7. Settlement:
   • This is the last stage in the trading of securities done by the brokers on behalf of their clients.
   • The investor has to deliver the shares/or pay cash for the shares bought.

Cash in cash-out day

• Cash in day: - Cash is paid or securities are delivered on the pay-in day, which is before the T+2 day as the deal has to be settled and finalized on the T+2 day. The settlement cycle is on T+2 days on a rolling settlement basis.
• Cash-out day: -On the T+2 day, the exchange will deliver the share or make payment to the other broker. This is called the pay-out day. The broker then has to make payment to the investor within 24 hours of the payout day since he has already received payment from the exchange.

Contract note:-

1. This note contains details of the number of shares bought or sold, the price, the date and time of the deal, and the brokerage charges.
2. This is an important document as it is legally enforceable and helps to settle disputes/claims between the investor and the broker.