Custodian Vs. CDP Accounts: A Guide for Singapore Investors

Entering the world of investment in Singapore stocks necessitates a well-considered approach, with opening a brokerage account being the essential second step in this intricate journey. But understanding the structure and type of accounts available before you plunge into the markets is paramount. It involves making a crucial choice between two types of brokerage accounts: CDP and Custodian accounts.

A Central Depository (CDP) account facilitates the holding and settlement of shares, while a brokerage firm holds a Custodian Account on the investor’s behalf. Both come with distinct advantages and requirements, forming the backbone of your investment operations in Singapore stocks. This guide will help you understand more about CDP vs. Custodian accounts. Let’s get started.

Key Differences Between CDP and Custodian Account

CDP-Linked Brokerage Account

A CDP-Linked Brokerage Account, operated by the Central Depository Account (CDP), is an account that enables the clearing and settlement of transactions along with the custody of securities in Singapore. Its primary purpose is to provide many investors with legal ownership and simplified management of their local investments and Singapore shares.

Scenario

Mary is a local investor who wants legal ownership and simplified management of her local investments in Singapore. She wants to safeguard her newly purchased Singapore-listed securities. And the best way to achieve this is to get a CDP-Linked brokerage account. She approaches brokerage firm X and opens an account with them. 

Afterward, she begins funding the account and investing in the same bank account. In this case, Mary is the legal owner of the stock, and she can store all her purchased financial products in her CDP-linked brokerage account. The account enables the clearing and settlement of transactions and the custody of securities in Singapore. Mary is the legal owner of the securities through a CDP securities account.

Pros

• Investors have legal ownership of the securities through a CDP securities account.
• Simplifies the buying and selling process.
• Direct communication with companies.

Cons

• It may include higher fees.
• Primarily caters to the local market.

Types of Investments It Holds

A CDP Account mainly holds investments connected to the Singapore market. This includes shares, bonds, and other securities traded on the Singapore Exchange (SGX). It is a unified platform for Singaporean investors to manage local assets efficiently.

Details of Ownership and Storage

Ownership in a CDP Account is direct, meaning the investor legally owns the assets. The CDP account stores these securities electronically, ensuring safe and transparent management. This direct ownership enables extra accessible communication with companies as well as a streamlined procedure specifically for dividends and other corporate steps.

How to Open a CDP Account 

Here’s a step-by-step guide on how to start trading:

1. Select a Brokerage Firm: Choose a broker that provides CDP Accounts.
2. Fill out the Application Form: Fill out all the forms offered by the brokerage or CDP account.
3. Provide the Supporting Documents: Give the required identification and proof of residency.
4. Wait for feedback: Allow time for your application to be processed and approved.
5. Fund the CDP Account: When approved, begin funding the CDP account and start investing in the same brokerage account.

A CDP Account is a vital tool for investors interested in SG stocks or financial markets. It provides direct ownership and excellent management of local securities. Additionally, Its structure provides you with advantages and limitations, making it a priority for investors to evaluate it hand in hand with their investment process and objectives.

Custodian Account

A Custodian Account is mainly a financial account held by a financial institution or brokerage firm on behalf of the investor. Its main mandate is protecting the investor’s securities and performing administrative operations like clearing and settling trades, mainly for overseas stocks. 

Scenario

John is a businessman who has grown his investments, and now he wants to invest in international securities and get protection for his assets. John also wants someone to operate administrative operations like clearing and settling trades, mainly for overseas stocks for him. And so, the best way he can achieve this is to open a custodian account at a brokerage firm and invest in it. 

He allows the financial institution to maintain the account for a specific period for his benefit. The brokerage firm mainly protects John’s securities and performs all his administrative tasks. Two parties are involved here, the beneficiary and the custodian; the custodian is the brokerage firm, while John is the beneficiary.

Pros

• Using a Custodian Account allows you to invest in international securities.
• The brokerage firm manages administrative tasks.
• A Custodian Account provides more protection for assets in the financial markets.

Cons

• The brokerage firm holds the securities, not the investor directly.
• Dividend payouts or communication with companies may take longer.
• May incur additional custody fees for various services.

Types of Investments It Holds

A Custodian Account can hold many investments, including SG stocks, US stocks, bonds, mutual funds, and other securities in both local and international financial markets. Using a Custodian Account provides access to global investment opportunities, enabling investors to diversify their portfolios. 

Details of Ownership and Storage

Ownership in a Custodian Account is indirect, with the broker or financial institution holding the securities on behalf of the investor. This setup adds a layer of protection, as the custodian is responsible for safeguarding the assets. However, it also means that specific actions, like receiving dividends or communicating with companies, might take longer.

How to Open a Custodian Account

According to moneysense.gov.sg, here’s a step-by-step guide on how to start trading:

1. Select a Brokerage or Financial Institution: Choose a provider that offers Custodian Accounts.
2. Read and Understand the Terms and Brokerage Fees: Review the associated commission fees, custody fees, and terms of the custodian services.
3. Complete the Application Process: Fill out the necessary forms and provide the required documentation, including the specified bank account.
4. Wait for Approval: Allow time for the review and approval of your application.
5. Fund the Account: You can transfer funds to your Custodian Account and start investing once the bank account is open.

A custodian bank account is a versatile tool for investors seeking to access local and global markets like US stocks. While offering professional management and added security, it comes with the trade-off of indirect ownership and potential delays in some processes. Understanding these nuances helps investors make informed choices that align with their investment goals and preferences.

Tips for Choosing the Best Brokerage Accounts in Singapore

Choosing the right brokerage firm is pivotal to starting your investment journey. Here’s a detailed list of tips for selecting the best brokerage account in Singapore, catering to your specific needs and goals:

• Understand Your Investment Needs

Analyze your investment objectives and preferences. Whether looking at local or foreign markets, online or in person, ensure the brokerage account aligns with your goals.

• Compare Charges

Examine the SGX trading fee, transfer fee, clearing fee, commission fee, platform fee, account maintenance fee, and other fees among brokerage firms. Lower prices and competitive rates can significantly impact your overall returns, especially for frequent traders. 

• Assess the Types of Investments Available

There are many types of investments in Singapore, as Chee Hong Tat, the Acting Minister for Transport and Senior Minister of State for Finance, notes – “Investment promotion has been a cornerstone of Singapore’s economic growth over the years.”

Other brokerages offer access to specific stock markets or investment types. Therefore, ensure that the chosen broker provides access to the financial products you’re interested in.

• Evaluate the Trading Platform

Investigate the user-friendliness and features of the broker’s trading account. Most brokerage firms offer a centralized location, intuitive and reliable tools, and the tools necessary for your trading style. The trading platform should also have shareholder rights as well as voting rights.

• Check for Regulatory Compliance

Ensure the brokerage firm is regulated by the appropriate authorities in Singapore, such as the Monetary Authority of Singapore (MAS). Whether you opt for a CDP or custodian account, compliance ensures that the firm adheres to legal standards and best practices.

• Consider Customer Service

Gauge the responsiveness and expertise of the trading account customer support. Effective customer service is crucial for resolving queries and issues promptly. Consider a brokerage account that has online robot advisors and answers queries for both old and new users.

• Review Account Types

Whether it’s a Custodian Account, a CDP-Linked Account, or other options, understand the differences and choose the one that best fits your investment strategy. An account that is typically cheaper doesn’t guarantee great investments. So do your due diligence before settling for one.

• Look at Additional Services

Some brokers offer value-added services like research reports, transfer shares, sell shares, investment guidance, or educational resources. Assess if these services align with your needs.

• Read Reviews and Testimonials

Gather insights from other investors through the reviews and testimonials of most brokerages. Their experiences can provide valuable perspectives on the broker’s performance and reliability.

By carefully considering these aspects, Singapore investors can identify brokerage firms that best match their investment needs, preferences, and expectations, facilitating a more efficient and tailored investment journey.

See Also: How to Open a Brokerage Account in Singapore

Best Brokerage Accounts in Singapore 2024

FAQs

Is Tiger Brokers a Custodian or CDP?

Tiger Brokers, a popular brokerage firm in Singapore, operates as a custodian account holder. Unlike a CDP Account, where investors have direct ownership of the securities, a Custodian account like Tiger Brokers holds the securities on behalf of the investor in a Singapore bank account.

This model enables Tiger Brokers to offer access to various Singapore stocks and international financial markets, aligning with the needs of larger investors seeking diversified investment opportunities. Larger Investors should carefully consider this structure, understanding the distinctions between CDP and Custodian Accounts, to ensure that it aligns with their investment preferences and objectives in the stock market.

Read More: Tiger Brokers vs Interactive Brokers

Is DBS Vickers Custodian or CDP Account?

DBS Vickers offers Custodian and CDP accounts to cater to different investor needs. A CDP Account would be appropriate for those seeking direct ownership of their Singaporean securities and direct communication with companies.

Conversely, the Custodian Account option through DBS Vickers enables investors to access both local and international markets, with the brokerage firm holding the securities on behalf of the investor. The choice between these two types of accounts would depend on individual investment strategies, preferences, and the specific markets, like US stocks, an investor wishes to access.

What Is the Difference Between a Broker Dealer and a Custodian?

A Broker Dealer is an institution or firm that mostly buys and sells securities on behalf of clients as well as for its own account. Broker dealers actively facilitate trades, offer investment advice, and may offer a wide array of investment products.

On the other hand, a Custodian Account is a financial institution responsible for safeguarding an individual’s or institution’s financial assets, typically holding securities such as SG stocks and bonds. Unlike a Broker Dealer actively involved in trading, a Custodian Account primary role is to control and protect assets, manage administrative tasks, and provide stability without directly engaging in buying and selling activities.

The distinct functions of these two entities underline diverse roles and responsibilities in the financial ecosystem, reflecting the intricate needs and requirements of investors and the market alike.

Closing

Both options have different advantages and limitations tailored to various choices and preferences. A Custodian Account offers enhanced security and access to global markets, but with indirect ownership. On the other hand, a CDP Account ensures direct rights and outstanding local investment handling but may contain various fees. 

Key Takeaways

• Custodian Accounts provide indirect ownership with access to global markets, while CDP Accounts allow direct ownership primarily for local investments.
• Custodian Accounts may have additional fees like commission fees and typically cheaper but potentially slower communication with companies, whereas CDP Accounts offer more direct and efficient interactions but may also include various charges.
• Selecting the right brokerage account is pivotal to your investment journey. Consider factors such as investment needs, fees and charges, types of investments offered, trading platform features, regulatory compliance, customer service, account types, additional services, and reviews/testimonials to make an informed choice.

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