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Despite the seeming simplicity of the stock market, the market needs a regulatory body to carry out strict regulations to prevent fraud and malpractice.
It takes several corporate bodies working together to run market transactions properly. The system relies on the coordinated efforts of numerous parties to facilitate trading commodities, equities, and bonds.
The smooth execution of your transactions is made possible by the aligned efforts of market intermediaries, from accessing a trading terminal, for example, to purchasing stocks, to the moment these shares appear in your demat account.
SEBI, or the Securities and Exchanges Board of India, came into being in 1992 with the primary goals of keeping investors’ money safe and fostering growth in India’s securities market. SEBI developed certain protocols for market intermediaries with several checkpoints to reach these goals.
Understanding financial intermediaries in the stock market
When two parties are involved in a transaction, an intermediary acts as a go-between. Stockbrokers, commercial banks, investment banks, and depositories are examples of stock market intermediaries in India. The average customer can get multiple benefits from financial intermediaries, such as safety and liquidity.
These organisations work silently behind the scenes to comply with SEBI regulations and ensure that your share market transactions go off without complications. Financial intermediaries or market intermediaries are terms for these types of organisations.
These financial intermediaries work together to form an ecosystem that supports the financial markets.
Types of intermediaries in the stock market
The stock market has several different kinds of intermediaries, each with a distinct function. Here are a few of the most notable ones:
Stockbrokers: On behalf of their clients, stockbrokers place orders to purchase and sell stocks and other assets.
Banks: Commercial banks, investment banks, and similar entities act as financial intermediaries in the stock market.
Depository: The depository, registered with SEBI, is home to all the records and share certificates belonging to each investor with a demat account. All listed entities must join a depository to keep track of their issued shares. There are two depositories in India: NSDL and CDSL.
Clearing corporation: If an investor’s demat account is going to be credited or debited with shares, it has to be cleared by an equity clearing corporation.
Role of intermediaries in the stock market
Stockbrokers:
A stockbroker acts as an intermediary between traders and the stock exchange. For a corporation to legally trade stocks, it must first meet the requirements set down by the various stock exchanges. If you want to invest in equities, bonds, or mutual funds, you need to go via a stockbroker.
Depository:
Businesses provide investors with share certificates to verify their connection with the company and the number of shares they have purchased. The depository was established to provide the safe and easy keeping of electronic share certificates.
A demat account is where depositories keep the dematerialized share certificates. In addition to managing and regulating all DEMAT accounts, a depository is also responsible for electronically storing all securities data.
Banks:
To purchase shares, you must send money to your broker. When you sell shares, the stockbroker will credit the proceeds to your account. You will need a bank account to conduct financial transactions with your stockbroker. Therefore, banks play an essential role as intermediaries in the financial markets for the transmission of funds.
Clearing corporations
To finalise the deal, Clearing Corporation executes several processes, including:
- Matches suppliers and buyers based on their bidding and asking processes
- Guarantees the deal and makes sure there is no default by acting as both the buyer and seller.
Clearing corporations work to avoid defaults by making sure sellers have the assets they want to sell and purchasers have sufficient funds to make payments for their transactions.
Benefits of market intermediaries in the stock market
When people use a financial intermediary, they may combine their savings to make larger investments, which can be beneficial for the organisation that receives the funds.
Meanwhile, financial intermediaries diversify their clients’ assets among several loans and investments, thus reducing their overall exposure to risk.
There are several ways in which financial intermediaries help keep expenses down. For example, they may make use of economies of scale to save money on record keeping and properly assess the creditworthiness of prospective borrowers.
Finally, without the financial intermediary, an individual investor would find themselves paying much higher charges for all of their financial transactions.
Conclusion
The three stages of trading, clearing, and settlement are essential to the smooth operation of the capital market. With the help of the mentioned intermediaries, SEBI has developed measures to improve transparency and minimise risk, making it highly unlikely that any fraud or scam could take place at any point.
FAQs
Financial intermediaries in India serve three main functions. Firstly, they convert savings into investments, channelling funds from entities with surplus cash to those in need. Secondly, they provide storage facilities for cash and other liquid assets, like precious metals. Thirdly, they assist clients in growing their money via investments, using their expertise to offer products that aim to maximise returns and reduce risks.
In the context of an IPO in India, a depository is an institution that holds securities like stocks, bonds, and mutual fund units in electronic form. There are two main depositories: the National Securities Depository Limited (NSDL) and the Central Depository Services Limited (CDSL). They facilitate the dematerialization of securities, ensuring that specific securities are credited to an investor’s Demat account in exchange for the money invested during the IPO process.
Yes, you can have multiple Demat accounts in India. There’s no legal restriction on the number of Demat accounts one can hold. However, all accounts must be linked to the same PAN card, and you cannot open more than one Demat account with the same broker. While having multiple accounts can be beneficial for segregating investments, it also means managing multiple sets of paperwork and potentially paying more in terms of annual maintenance charges.
A clearing corporation is an institution that handles the clearing and settlement of trades executed on stock exchange platforms. It acts as an intermediary and assumes the roles of buyer and seller to reconcile orders. A depository, on the other hand, holds the securities of investors in dematerialized form through registered depository participants. While clearing corporations focus on the transactional side of the trading process, depositories focus on the holding and safekeeping of securities.
Choosing between NSDL and CDSL depends on individual needs and priorities. NSDL, established by the National Stock Exchange, might be preferred if you primarily trade on the NSE. CDSL, established by the Bombay Stock Exchange, offers a wider DP network and advanced features like pledge and hypothecation. Both are reliable and offer similar services, so the choice often comes down to the specifics of the services offered by your depository participant.