As soon as you dip your feet into the stock market, the first action you take, like right from opening a Demat account, buying a stock, holding it and eventually selling it someday, many corporate entities are actively involved in the entire process.?
Quietly behind the scene, these entities ensure smooth processing of transactions along with compliance with SEBI rules and regulations. These entities are none other than the financial intermediaries.
By working together, these interdependent intermediaries create an ecosystem in which the stock markets exist and operate. Curious to know who these are??
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One of the most crucial intermediaries that exist and you need to know, is the stockbroker.
A stockbroker is a corporate entity, registered as a trading member with the stock exchange, like NSE, BSE etc, and most importantly, holds a stockbroking license. Stockbrokers operate under the guidelines prescribed by the market regulator SEBI.
Simply put, a stockbroker is your gateway to the stock exchanges. First, you need to open a trading account with a broker who meets your requirements. The trading account lets you carry financial transactions in the market. Through your trading account with the broker, you can buy/sell securities.
When you have a trading account with the broker, you can usually interact with the broker in these ways.?
Either you can go to the broker¡¯s office and communicate the actions you want to take, you can make a telephone call to your broker and place the order for your transaction, or you can even do it yourself. For this method, the broker gives you access to the market through software called ¡®Trading Terminal¡¯, wherein you can place the orders yourself.
And remember, the broker charges a fee for the services provided, known as the ¡®brokerage charge¡¯ or just brokerage.?
Can you claim that a property is yours without producing the proof in the form of property papers? No, right?
Likewise, when you buy a share, the only way to claim your ownership is by producing your share certificate, which is a document entitling you as the owner of the shares in a company.
Share certificates are provided in digital form, unlike earlier days when they were provided in paper format.?
The conversion of a paper format share certificate into a digital format share certificate is called ¡°Dematerialization¡± often abbreviated as DEMAT.
Being digital in nature, the share certificate in DEMAT format has to be stored digitally in the storage place called the ¡®DEMAT Account¡¯.?
Now comes the depository, which is a financial intermediary that offers the service of the Demat account. It is in your Demat account that all the shares that you bought are present in electronic format. It¡¯s like a digital vault for your shares.
At present, there are two depositories in India. The National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited. Both of them operate under market regulator SEBI¡¯s regulations.
And what about depository participants (DP)? Just like the way you cannot just casually walk into BSE or NSE¡¯s office to open a trading account, you cannot go straight to a Depository to open a DEMAT account. That's exactly why DP is needed. A depository participant helps you set up your DEMAT account with a Depository by acting as an agent to the Depository. Just like brokers and depositories, DPs too, are governed by the regulations put forth by SEBI.
Needless to say, banks have a very straightforward role in the stock market ecosystem. They help in facilitating the fund transfer from your bank account to your trading account and Demat account. You can even link multiple bank accounts to your trading through which you can transfer funds and then trade or invest in the stock market.?
Whether you want to purchase stocks, invest in mutual funds, sell the existing investments, do trading, or receive the dividend payments, bank accounts act as both the originating and ending terminal.?
Another vital intermediary in the stock market is the clearing house/corporations. As a trader or investor, you would usually not be interacting with the clearing houses directly, which is why many of you might be unaware of this intermediary.?
The job of clearing corporations is to ensure the settlement of your trades/transactions. They do so by identifying the buyer and seller and then matching the debit and credit process to carry out the order settlement timely, without any default. They too, work under market regulator SEBI¡¯s guidelines.
Currently, there are three clearing houses/corporations in the stock market-NSE Clearing Limited, MCXCCL and ICCL.
NSE Clearing Limited and Indian Clearing Corporation Limited are wholly owned subsidiaries of the National Stock Exchange and Bombay Stock Exchange, respectively.
Whereas the relatively recent entrant MCXCCL, which became India¡¯s first Clearing Corporation in the Commodity Derivatives Market in 2018, is a wholly-owned subsidiary of Multi Commodity Exchange of India Ltd (MCX).
Besides these intermediaries which mostly pertain to the secondary market, the financial intermediaries pertaining to the primary stock market are no less important. These include a wide array of intermediaries, like merchant bankers, registrars, underwriters, bankers to an issue, etc.
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And now. After the secondary market, let us understand the key intermediaries in the primary stock market.
The key role of merchant bankers is to act with due diligence when preparing the offer document containing all the required details about the company that is going for issuance in the primary stock market. Also, merchant bankers are responsible for ensuring compliance with the legal formalities in the entire issue process as well as for the marketing of the issue.
Primarily, issues made by a company in the primary stock market include Initial Public offer (IPO), Further Public Offer (FPO), Rights issue, Composite Issue, Bonus issue, or private placement.
This intermediary is involved in finalizing the basis of allotment in an issue, besides taking care of sending refunds, allotment details, etc.?
These enable the movement of funds in the issue process and hence, enable and facilitate the registrars to finalize the basis of allotment by making available the clear funds status to the Registrars of the issue.?
Another key intermediary is the underwriter. Underwriters dictate the overall issuance and distribution of stocks on behalf of the company. But their role is usually most vital at the IPO stage. After determining the IPO prices for different companies, underwriters tend to guarantee the purchase of a specified number of shares themselves,?
To cover the risk of deviation in estimation, which results in securities not getting fully subscribed by the public, the underwriters undertake the role of subscribing to the specified number of securities offered by the issuing company.
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