Understanding Key Players That Make the Stock Market Work
In the stock market, financial intermediaries play an important role in connecting investors with the market. Not just that, they collectively ensure that the market functions smoothly and as per the rules and regulations set by SEBI. Who are these financial intermediaries? Well, for instance, individual investors who want to buy shares will engage SEBI registered stock brokers. But stock brokers aren’t the only financial intermediary. There are several intermediaries such as depository participants, Banks and MIIs such as stock exchanges & depositories etc. that facilitate the functioning of the securities market. Let us describe a few in detail
Stockbrokers: Stockbrokers are one of the most important financial intermediaries as they execute buy and sell orders for stocks and other assets on behalf of investors. They also offer guidance and support in making investment decisions for both individual and institutional investors. Stockbrokers are like your single-point of contact for investors. Stockbrokers need to be registered as a trading member with the stock exchanges and possess a valid licence. They function within the regulatory framework set by SEBI.
- Offer you access to markets and enable transactions.
- Offer help with either phone-based trades or trading software or platform.
- Issue contract notes to confirm daily transactions.
- Facilitate securities transfers from demat account and fund transfer from bank account.
Note: Stockbrokers charge fees, known as the 'brokerage charge' for the services they provide. Brokerage rates vary from one stockbroker to another. Some charge a flat fee whereas others take a percentage of the value of the securities traded.
- Full-service Brokers: These brokers offer a wide range of products and services to their clients. Besides securities trading, they offer guidance on personal investment, retirement planning and portfolio management. They also share their expertise on capital gains taxes with the clients to give them personalised service. They charge a significant fee for the breadth of services they offer.
- Discount Brokers or Online Brokers: In contrast to traditional full-service brokers, discount or online brokers offer internet trading services at a reduced cost. These brokers typically provide clients with access to a no-frills trading platform. They charge lower brokerage fees as compared to full-service brokers. Investors who oversee their assets on their own prefer discount brokers to reduce their trading costs.
Depository Participants
Just like you keep your money safe in the banks. Similarly, a depository is a special financial institution that keeps your securities, bonds and stocks secure in the electronic form. It eliminates the need for physical certificates and allows electronic book entry transfers, making transactions safe and secure. For instance, NSDL is a depository. It is among the world's largest depositories and has an advanced infrastructure to manage a significant portion of securities settled in dematerialised form.
However, you cannot directly open accounts with NSDL. For that, you have to go through depository participants. When you open a demat account with a depository participant, you gain access to the services offered by the main depository. In simple words, you have to contact a DP to open a demat account.
- They facilitate the opening of demat accounts for investors.
- They convert physical share certificates into electronic or demat form.
- They also assist investors in converting electronic securities back into physical certificates if required. This is known as rematerialization.
- They securely hold and maintain investors' electronic holdings in demat form.
- They play a crucial role in settling trades by facilitating the transfer of securities and funds between buyers and sellers.
- They help investors to pledge their demat securities as collateral for loans and assist in the process of unpledging when needed.
- They facilitate the transfer of demat securities between different demat accounts, either within the same DP or across different DPs.
Banks: Investment banks assist companies in getting money by handling initial public offerings (IPOs) and launching new securities. They also offer advice for mergers and acquisitions. As far as investors are concerned, banks assist in transferring funds from your bank to your trading account.
Clearing Corporations: Clearing Corporations are entities responsible for confirming, settling and delivering transactions. In India, there are two clearing corporation each of them is wholly owned subsidiary of National Stock Exchange and Bombay Stock Exchange respectively. These settlement bodies are regulated by SEBI. Investors do not need to directly interact with these bodies.
Who is the Regulator of Financial Intermediaries in the Securities Market?
In India, the primary regulatory body overseeing financial intermediaries in the stock market is the Securities and Exchange Board of India (SEBI). SEBI oversees and regulates stockbrokers, depository, depository participants and clearing members.