For anyone stepping into the world of investments, the question of where your hard-earned money is stashed away can be quite puzzling.
In Singapore, investors face a crucial decision between two main options: Central Depository (CDP) accounts and Custodian accounts. Each of these options comes with its own set of advantages and limitations, tailored to suit the unique investment landscape of the country.
In this comprehensive guide, we’ll delve into the key distinctions between CDPs and Custodian accounts, helping you to make a well-informed choice that aligns with your investment goals.
Table of Contents
Deciphering the Central Depository (CDP) Account
At the core of Singapore’s securities market lies the Central Depository, commonly known as CDP. Managed by the Singapore Exchange (SGX), this centralized account provides a secure haven for locally-listed securities. Think of it as a financial fortress guarding your investments.
Not only does the CDP account encompass stocks, it also functions as a repository for a range of other investments listed on the SGX, such as Treasury bills (T-bills) and Singapore Savings Bonds (SSBs).
When your stock trading account is connected to the CDP, the stocks you acquire are registered under your name and kept safe within the confines of the CDP account.
What is the difference between a CDP and a custodian account?
The main difference between a CDP account and a custodian account is who owns the stocks.
In a CDP account, the stocks belong directly to you. This means you own them and have certain rights with them.
In a custodian account, the broker holds onto your stocks for you.
|Aspect||CDP Account||Custodian Account|
|Legal Ownership||Shares directly owned by you.||Shares owned via the broker.|
|Participation||Invited to AGMs, exercise voting rights.||Voting preferences and AGM attendance facilitated through your broker.|
|Notifications||Receive company notifications directly.||Broker relays information to you.|
|Dividend Handling||Dividends credited directly to your bank account.||Dividends paid to the broker and subsequently redistributed to you.|
|Buying and Selling||Securities held centrally, enabling buying and selling through linked trading accounts (with potential transfer fees and non-immediate transfers).||Stocks maintained within respective brokerages’ custodian accounts, necessitating transactions through the same broker.|
|Fees and Charges||Generally entails higher trading fees, alongside additional clearance and trading fees.||Typically offers lower trading fees, with custody fees and other charges varying among brokers.|
Now, let’s delve deeper into the pros and cons of CDP accounts:
Pros of CDP Account
1. Brokerage Freedom
One of the most appealing aspects of the CDP account is its flexibility. Since it’s a centralized account, you’re not tied down to a single brokerage. Instead, you have the liberty to select any brokerage that offers CDP account linkage. This empowers you to invest on one platform and make sales on another, giving you a significant level of choice.
*Please take note that not all brokerage firms offer a CDP-Linked Account.
2. Your Name, Your Investment
Having a CDP account ensures that the stocks you purchase are associated with your name. This translates to you being the rightful owner, entitled to all the perks that come with being a shareholder.
This includes the privilege of participating in Annual General Meetings (AGMs) and exercising your voting rights on important company matters.
Furthermore, you’ll receive direct notifications about critical events like rights issues and dividend reinvestment plans, bypassing the need for a broker as an intermediary.
3. Enhanced Security
In a CDP account, the shares are held directly in your name. This means that even if the broker you’re using faces financial difficulties or bankruptcy, your shares remain safeguarded within the CDP.
This offers an additional layer of security, assuring you that your investments won’t be impacted by such circumstances.
Cons of CDP Account
1. Fees and Charges
While the ownership benefits are significant, CDP accounts come with certain costs. These include clearing fees, trading/settlement fees, processing fees for failed contracts, and brokerage rates. These fees can potentially erode your investment returns.
Here are some key fees to take note of when you consider using a CDP account:
- Clearing fee: 0.0325% of contract value
- Trading/Settlement fee: 0.0075% of contract value
- Processing fee of S$80.25 (Inclusive of GST) for each failed contract
- Brokerage rate: 0.75% of each buy-in contract
2. Singapore-Centric Limitation
CDP accounts are restricted to Singapore-listed securities. If your investment horizons extend beyond the local market, you’ll need to consider setting up a Custodian account through your brokerage to access international securities.
How do I open a CDP account?
Getting a CDP account is simple. You can apply for an Individual CDP Securities Account using Myinfo or by filling out an online form.
If you’re 18 years old or older, you’re eligible to apply for a CDP account. The best part is that CDP doesn’t charge any fees for opening or maintaining the account.
Once you have your CDP account, you’ll want to start buying or selling investments. To do that, you need to connect your CDP account with a trading account.
Exploring Custodian Accounts in Singapore
In contrast to CDP accounts, Custodian accounts are typically managed and operated by financial institutions. They offer a distinct set of advantages and disadvantages that cater to Singapore’s investment landscape. Let’s dive into the benefits of Custodian accounts:
Pros of Custodian Account
1. Cost-Effective Approach
A custodian account generally offers cost savings in comparison to a CDP account. This primarily stems from the requirement to trade through the same brokerage account. This limitation gives brokerage firms confidence that you’ll remain their customer after the initial investment.
Additionally, the dividends you receive from your investments are typically stored in a cash wallet provided by your brokerage. This setup also encourages you to continue using the brokerage’s services, whether it’s for purchasing insurance or utilizing their cash management offerings.
By retaining you as a valued client, the brokerage gains potential revenue streams (in the form of brokerage fees). This motivates them to consider charging lower fees compared to a CDP account.
2. Investment Diversity Across Borders
If your aim is to invest in foreign securities, a custodian account becomes necessary. These accounts have the capability to house both Singaporean and international securities, affording you the opportunity to craft a diversified investment portfolio.
While certain nations provide their own central depository accounts, this approach necessitates the management and monitoring of multiple depository accounts. Opting for a custodian account eradicates this hurdle and offers you simplicity and convenience.
3. Enhanced Privacy Protection
Under Custodian accounts, your investments are registered under the broker’s name. This provides an added layer of privacy for investors who prefer to keep their personal information detached from their investment holdings.
Cons of Custodian Account
1. Ownership Distinction
As highlighted earlier, stocks held in a Custodian account are not directly registered under your name. This means that while you can sell these stocks, you won’t enjoy the full rights of a regular shareholder.
Consequently, you would need to rely on your broker to receive updates from the company, access annual reports, and potentially attend AGMs.
2. Unveiling Hidden Costs
While generally more cost-effective than CDP accounts, Custodian accounts might harbor undisclosed charges such as custodian fees, account maintenance fees, trading fees, and transfer fees. It’s imperative to thoroughly examine potential charges before committing to this option.
Navigating the Decision: CDP or Custodian?
As you stand at this crucial crossroads, the decision between a CDP account and a Custodian account hinges on your investment goals and preferences. If the freedom to choose among brokerages, direct ownership of assets, and immediate dividend deposits resonate with you, a CDP account emerges as a strong contender. Conversely, if cost-efficiency, investment diversification, and privacy preservation top your list, a Custodian account could be a better match.
Remember, if your investment journey includes international markets, a Custodian account is important. In Singapore’s bustling brokerage landscape, options like Webull and MooMoo offer competitive rates for Custodian accounts, striking the right balance between investment value and service quality.
In Conclusion: Your Investment, Your Journey
Ultimately, the choice between a CDP account and a Custodian account is yours to make. Armed with a comprehensive understanding of the advantages and drawbacks of each option, you’re better equipped to steer your investment strategy toward your financial aspirations.
Disclaimer: This article is for educational purposes only and does not constitute financial advice. Make sure to conduct thorough research and consult professionals before making investment decisions.