Financial Intermediaries in the (Share Market Part 4)
We have gained knowledge about Regulatory in Share Market Part 3 Now Read this Part 4 for Financial Intermediaries.
Financial Intermediaries in the Stock Market
The stock market, with its vast array of investment options and intricate processes, can be a labyrinth for new investors. But fear not! Just like any complex system, the stock market functions smoothly thanks to a network of specialized players known as financial intermediaries. From the time you access the market – let’s just say, to buy a stock till the time the stocks come and hits your DEMAT account, a group of corporate entities are actively involved in making this work for you. These entities play their role quietly behind the scene, always complying with the rules laid out by SEBI and ensure an effortless and smooth experience for your transactions in the stock market. These entities are generally referred to as the Financial Intermediaries.
These intermediaries act as bridges between buyers and sellers, facilitating transactions, ensuring market stability, and safeguarding investor interests. Understanding their roles and functions is crucial for anyone venturing into the exciting world of stocks.
Who are Financial Intermediaries?
Financial intermediaries are individuals or institutions that act as middlemen, connecting buyers and sellers in the stock market. They perform a diverse range of functions, from executing trades and providing investment advice to ensuring regulatory compliance. Their involvement helps maintain market efficiency, liquidity, and transparency, fostering a healthy investment environment.
Key Players in the Stock Market Ecosystem:
The intricate tapestry of the stock market is woven by various intermediaries, each playing a specific role:
1. Stockbrokers: The stockbroker is probably one of the most important financial intermediaries that you need to know. A stockbroker is a corporate entity, registered as a trading member with the stock exchange and holds a stock broking license. They operate under the guidelines prescribed by SEBI. Your trusted guides in the investment arena, stockbrokers are licensed professionals who act as your direct link to the market. They execute buy and sell orders on your behalf, handle the necessary paperwork, and offer valuable investment guidance tailored to your financial goals and risk tolerance.
The basic services provided by the brokers includes…
1. Give you access to markets and letting you transact.
2. Give you margins for trading – We will discuss this point at a later stage.
3. Provide support – Dealing support if you have to call and trade. Software support if you have issues with the trading terminal.
4. Issue contract notes for the transactions – A contract note is a written confirmation detailing the transactions you have carried out during the day.
5. Facilitate the fund transfer between your trading and bank account.
6. Provide you with a back-office login – using which you can see the summary of your account.
7. The broker charges a fee for the services that he provides called the ‘brokerage charge’ or just brokerage. The brokerage rates vary, and it’s up to you to find a broker who strikes a balance between the fee he collects versus the services he provides.
2. Investment Banks: These financial institutions are the architects of capital formation in the primary market. They assist companies in raising capital through initial public offerings (IPOs) and secondary offerings, acting as advisors and underwriting the issuance of new securities. Additionally, they provide expert advice for mergers and acquisitions, guiding companies through complex financial transactions.
Banks play a very straight forward role in the market ecosystem. They help in facilitating the fund transfer from your bank account to your trading account. You may be interested to note that for a given trading account only one bank account can be interlinked. You cannot transfer money from a bank account that is not in your name.
If you have multiple bank accounts, you need to specify which particular bank account that will be linked to your trading account. Of course, you can remove the bank account and link it with another bank account of yours, but that requires some amount of paper work.
However, for the money to come in and go out of your trading account, it has to happen only via the bank account that has been specified and linked.
Also, at this stage, you must have realized that the three financial intermediaries operate via three different accounts – trading account, DEMAT account and Bank account. All the three accounts operate electronically and are interlinked giving you a very seamless experience.
3. Market Makers: Ever wondered how bid and ask prices are constantly available for specific securities, even when there might not be an immediate buyer or seller? Market makers are the answer! These entities act as liquidity providers, continuously quoting bid and ask prices to facilitate trades and ensure smooth market operation. By maintaining a steady flow of buy and sell orders, they prevent market disruptions and enable efficient price discovery.
4. Depositories and Depository Participants (DPs): Imagine a secure vault safeguarding your precious stock certificates. That’s the role of depositories! These institutions hold your securities electronically, ensuring their safekeeping and efficient management. Depository participants (DPs) act as intermediaries between investors and depositories, providing convenient access to your holdings and facilitating trade settlements.
At present there are only two depositaries offering you DEMAT account services. They are The National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited. There is virtually no difference between the two and both of them operate under strict SEBI regulations.
Just like the way you cannot walk into National Stock Exchange’s office to open a trading account; you cannot walk into a Depository to open a DEMAT account. To open a DEMAT account you need to liaison with a Depository Participant (DP). A DP helps you set up your DEMAT account with a Depository. A DP acts as an agent to the Depository. Needless to say, even the DP is governed by the regulations laid out by the SEBI.
5. Clearing Corporations: Acting as the central counterparties in stock market transactions, clearing corporations play a critical role in ensuring timely settlement and reducing risk. They guarantee trades by acting as intermediaries between buyers and sellers, ensuring the smooth flow of funds and securities. By assuming the counterparty risk, they safeguard the stability of the financial system.
NSCCL – National Security Clearing Corporation Ltd and Indian Clearing Corporation are wholly owned subsidiaries of National Stock Exchange and Bombay Stock Exchange respectively.
The job of the clearing corporation is to ensure guaranteed settlement of your trades/ transactions. For example, if you were to buy 1 share of Tata Power at Rs.446 per share there must be someone who has sold that 1 share to you at Rs.446. For this transaction, you will be debited Rs.446 from your trading account and someone must be credited that Rs.446 toward the sale of Tata Power. In a typical transaction like this the clearing corporation’s role is to ensure the following:
a) Identify the buyer and seller and match the debit and credit process.
b) Ensure no defaults – The clearing corporation also ensures there are no defaults by either party. For instance, the seller after selling the shares should not be in a position to back out thereby defaulting in his transaction.
For all practical purposes, its ok not to know much about NSCCL or ICCL simply because, you as a trader or investor would not be interacting with these agencies directly. You just need to be aware that there are certain professional institutions which are heavily regulated, and they work towards smooth settlement, and efficient clearing activity.
6. Regulatory Bodies: The guardians of the market, regulatory bodies like the Securities and Exchange Board of India (SEBI) play a vital role in maintaining market integrity and protecting investor interests. They establish and enforce regulations, investigate market malpractices, and promote fair practices to ensure a level playing field for all participants.
Benefits of Financial Intermediaries:
Financial intermediaries are the unsung heroes of the stock market, offering a multitude of benefits to investors:
- Streamlined Transactions: By acting as intermediaries, they bridge the gap between buyers and sellers, ensuring smooth execution of trades and eliminating the complexities of directly navigating the market.
- Enhanced Liquidity: Market makers and other intermediaries play a crucial role in maintaining a continuous flow of buy and sell orders, preventing market illiquidity and ensuring efficient price discovery.
- Expert Guidance: Stockbrokers and investment advisors leverage their experience and market knowledge to provide valuable insights and recommendations, empowering investors to make informed decisions aligned with their financial goals and risk tolerance.
- Regulatory Compliance: Intermediaries play a vital role in adhering to market regulations and investor protection guidelines set by regulatory bodies, fostering a safe and trustworthy investment environment.
Choosing the Right Intermediary:
With a diverse array of intermediaries available, selecting the right one is crucial for your investment journey. Consider the following factors when making your choice:
- Experience and Expertise: Look for intermediaries with a proven track record and a team of qualified professionals who possess the necessary expertise to cater to your specific investment needs.
- Fees and Charges: Compare the fee structures and service charges of different intermediaries to ensure you get the best value for your investment.
- Services Offered: Consider the range of services offered by each intermediary, such as investment research, portfolio management, and access to investment products, to ensure they align with your investment goals and preferences.
- Investment Philosophy: Choose an intermediary whose investment philosophy resonates with your own risk tolerance and financial objectives.
Conclusion:
Financial intermediaries are the cornerstones of the stock market, playing an indispensable role in facilitating transactions, maintaining market stability, and protecting investor interests. By understanding their functions and navigating the diverse landscape of intermediaries, you can embark on your investment journey with greater confidence and make informed decisions that pave the way.
Now we will know about the Share Market’s next Chapter in Our Share Market Part 5 article.
If you wish Start Investing So, you can Open a Demat Account and Start Watching Movement and When you have gained proper knowledge you should start Investing.
It’s important to note that investing in the stock market carries inherent risks. Before making any investment decisions, it’s crucial to conduct thorough research, understand your risk tolerance, and consult with a financial advisor if needed.
