Introduction
A depository participant and a stock broker are two of the many market participants in the world of stock trading. Hence, each of these participants have a defined role to serve to the investors and ease the process of stock trading in a smooth and efficient manner.
You might also like: What Is The Difference Between Preferential Issue And Rights Issue
What is a depository participant
Depositories are institutions that hold electronic versions of investors’ assets such as shares, debentures, bonds, government securities, and mutual fund units. Investors use a registered Depository Participant to create an account with the depository. They also offer services relating to de-materialized securities transactions.
Currently there are two Depositories in India that are registered with SEBI
- Central Depository Services Limited (CDSL), and
- National Securities Depository Limited (NSDL)
What is a stock broker
A stoke broker is a service provider that helps the investor to buy / sell the shares of a company from the stock exchange. As retail investors are not allowed to direct buy / sell shares from the stock exchange, the stocks brokers act like a mediator to facilitate these transactions.
Difference between depository participant and stock broker
Difference in terms of services offered
The major service offered by a depository participant is to store the shares of the investors in the digital format. Thus, they ensure that the shares of the rightful owners are stored in their name.
Every investor has a depository participant ID (DP ID) which is unique to every investor. As and when shares are brought or sold, they get credited / debited from their DP account.
On the other hand, a stock broker is a service provider to aid the buying and selling of stocks. It acts like a market place, where it makes available various shares for buying / selling.
Other services included
The depository participant usually works in the back end for all the securities transaction. A DP also coordinates with the custodian in settlement of dues between the buyer and seller of the shares.
A stock broker works in the front end of the business, where it involves directly with its investors to facilitate the transactions. These transactions are made from the back account to the trading account of the investor.
When the stock broker allows intraday trading, it also provides leverage to its investors. This means that, if an investor has Rs. 1 lakh in their trading account, the stock broker may provide a leverage of 2X to 10X. This allows the investors to trade in shares of up to Rs. 10 lakhs on a base capital of Rs. 1 lakh.
Leverage option is only available for intraday trading of shares. For positional trades, the investors needs to have the full amount to square of the settlement.
Also, the stock brokers may provide other standalone services like research reports, stock recommendations and investment tools in order to help the investor to take better decisions.
Source of earning income
Depository participants charge a fee when the shares are sold from the investors DP ID. These charges are called DP charges, which gets reflected on the contract note.
These charges are a fixed fee of Rs. 14.5/- on every sell transactions made from the DP. There are no charges levied on buying of shares. Thus, the price is a flat fee on every sell transaction and is independent of the amount of sell transaction.
The stock brokers on the other hand charges a brokerage fee on every buying and selling of shares. As a result, the brokerage gets paid twice for the transaction to close. SEBI has not put any limit on the brokerage fees that a stock broker needs to charge to its investors. Thus, the brokerage fee can be a set percentage of the transaction or a flat fee.
In the times of financial revolution in the country, there a lot of discount brokers that are available that charge a flat fee on every transaction. A classic example is Upstox.
Upstox is a discount stock broker that charges a flat fee of Rs. 20/- on every intraday transaction and free brokerage on delivery trades. It’s cutting edge app interface makes it easy for investor to buy and sell shares at ease.
Download the Upstox trading app and join 70 lakh+ customers to invest in stocks, mutual Funds, IPOs, F&Os, commodities and currencies at minimal brokerage charges.
Check out Upstox
Disclosure: I only recommend products I would use myself and all opinions expressed here are my own. This is an affiliate link, which means that I may earn a small commission at no additional cost to you, if you decide to open a demat account with my link.
In terms of storing shares and trading shares
A depository participant holds the shares in the demat account on behalf of the investor. The shares of the investor are hold till the date investor decides to make any transaction. This process creates an ease to the investor, rather than holding the shares in the physical form. This also, speeds up the process to sell the shares and creates better liquidity.
A stock broker runs the trading account of the investor. It provides easy transaction of funds from an investors bank account to trading account.
The capital from the trading account is used either to do intraday trading or buying / selling of shares. When an investor involves in intraday trading, the shares are not transferred in the demat account. Thus, the stock broker holds these shares with them while the trading activities take place, during the market hours.
Stocks are moved to the investor’s demat account in the event of positional trades. The process of transferring shares from the stock exchange to an investor’s account takes T+2 days.
In terms of linking with custodian and stock exchange
Depository participant and the custodian work together to settle all stock transactions between buyers and sellers.
While, the stock broker is connected to the stock exchange, which serves as a marketplace for investors to purchase and sell stocks. When you make an order with a stock broker, they place an order on your behalf at the stock market and help you complete the transaction.
When the buyer and seller agree on a price and order, their respective stock brokers execute the transaction.
Conclusion
Summary table
| Depository Participant | Stock broker |
|---|---|
| They aid the investors in storing of shares in digital form | They facilitate buying and selling of shares |
| A flat fee is levied on the investor when the shares are transferred from the demat account | A brokerage is changed on every buying and selling of shares |
| The DP is linked with the custodian and involves in the back end processes of account settlement | The stock broker deals with the stock exchange to buy and sell shares on behalf of the investor. |
Also read: Market Capitalization: The Right Way To Track Company’s Growth
