From the time an investor gains access to the market by buying a stock, till the time the stock is credited in the investor’s Demat account, multiple intermediaries are involved in the process flow.
These intermediaries play their role behind the scenes while complying with the requirements as laid down by the regulatory body – Securities and Exchange Board of India (SEBI).
These intermediaries seek to provide an effortless and smooth experience for transactions conducted in the capital markets. They are independent of each other and hence create an ecosystem.
In this blog, I seek to discuss the role of different financial intermediaries play as part of the capital markets ecosystem.
The broker is one of the most crucial participants in the capital market ecosystem. A broker is a corporate entity that is registered as a trading member with the stock exchange and holds a broking license.
These institutions operate under the guidelines as prescribed by the market regulator SEBI. A broker acts as a gateway to exchange for an investor.
To conduct trading in a stock, an investor needs a ‘Trading Account’ with a broker. An individual can select any broker depending on the services he/she is looking for and the costs involved with these brokers.
Once an individual selects a broker, he/she can open a trading account that allows an investor to carry out financial transactions (buying and selling of securities) in the market.
Thus at any time when you are willing to buy/sell a security, you need to interact with, your broker in manners provided by the broker.
Some of the services provided by the brokers are –
- Necessary documentation about the stock market.
- Provide access to the stock market and transaction processes
- Offers a margin for trading
- Provides trading platform – a platform is a tool (web tool or mobile app or even a desktop app) that can be used to put in trade orders
- Call and trade facility.
- Issue contract notes for the transactions conducted
- Facilitate the movement of funds from investor’s bank account to the trading account and vice versa
- Provide dashboard for a complete view of the transactions
- Customer support
- Provide a capital gains report for the financial year
Depository And Depository Participant
A share is a document that confirms your ownership in a company. Thus, you need to have a proof stating the same. When you buy or sell a stock, share certificates are issued. This acts as proof that you hold a certain number of shares of a company and you have acquired the same in a legit manner.
Previously, the certificates were issued in hard copy but with the rising volume and to improve efficiency along with the transaction process; the certificates are now being distributed in the electronic form.
The electronic form is also known as a dematerialized form (digital form) and is often termed as the Demat form. Thus, the Demat shares need an electronic safe to be kept safely.
To provide safety and security to the share certificate, the Demat account was introduced. The account acts as a digital vault for electronic shares.
A depository is an intermediary that provides the services of the Demat account. In India, two depositories offer the Demat account services. The services offered are –
- NSDL (National Securities Depository Ltd
- CDSL (Central Depository Services (India) Ltd)
There is no difference between the two, and both the entities are strictly regulated by the regulator, i.e., the Securities and Exchange Board of India (SEBI).
As an investor, you can’t go to exchange directly for trading and need the help of a broker.
Similarly, you cannot access depository directly and thus need a depository participant (DP) through whom you can access depository with the help of the Demat account.
Generally, when an investor opens a trading account with a broker, the broker also offers a Demat account.
Bank is a financial institution that facilitates the transaction in the capital market. The bank plays a significant role in the execution of trades as the bank manages the funds’ flow. It helps in channelizing the funds from an investor’s bank account to the investor’s trading account and vice versa.
A clearing corporation is a wholly-owned subsidiary of either the National Stock Exchange (NSE) or the Bombay Stock Exchange (BSE).
The role of clearing corporation is to ensure that all the trades placed by an investor on the exchange through a broker are closed successfully.
For example, if there is a buyer for ten stocks of Reliance Industries Ltd, there should a seller too selling at the same rate so that the trade executes. In India, there are two clearing houses –
- NSCCL (National Security Clearing Corporation Ltd)
- ICCL (Indian Clearing Corporation)
NSCCL is a part of the NSE, while ICCL is a part of BSE.
Role of the clearing corporation is detailed as under –
- Match the buyer and seller for the same security, price, and quantity to execute a trade.
- Check that neither buyer nor the seller defaults on their transactions. This means that the buyer and seller should not back out after opting for a deal.
To conclude, we can say that the stock market is a broad ecosystem with different participants. The process flow in the ecosystem is complicated, and thus, there is a well-defined scope of work that is carried out by various financial intermediaries, and the entire ecosystem is well-governed and regulated by the SEBI. All the financial intermediaries come together to make trading and/or investing a smooth process for the investor.
Disclaimer: The views expressed here are of the author and do not reflect those of Groww.