Stock market eco-system is made up of various entities. All these entities are regulated by SEBI. Most important entities which have various responsibilities in-between transactions are called financial intermediaries in stock market. It’s worth to understand these financial intermediaries in stock market.
In 1980’s lots of malpractices started in stock market because there was big profit involved. Traders started finding ways to get rich quickly. There was no governing authority to prevent any illegal activity. Thus investor rights were compromised. There was no authority where an investor/trader can express their grievances and seek justice. This led to the formation of a regulatory authority with power to set rules and responsibilities of various bodies in Indian stock market. SEBI was established on April 12, 1992, in accordance with the provisions of the Securities and Exchange Board of India Act, 1992. As provided on the official site of SEBI its function is “to protect the interests of investors in securities and to promote the development of, and to regulate the securities market and for matters connected therewith or incidental thereto”
Financial Intermediaries in Stock Market
Rules and responsibilities set by SEBI made stock market in India huge success. Traders/investors started believing that stock market is transparent and if they see a loss in their trade/investment that’s just because it’s part of the game.
Stock market is made up of financial intermediaries. From the time a security is bought to the time the security is sold, various financial intermediaries play their assigned roles in the process. All these intermediary are under scrutiny by SEBI and follow the rules strictly set by SEBI.
There are four main financial intermediaries in stock market.
- Stock broker
- basic stock market documentation
- Give you access to the stock market and let you transact.
- Give you margins for trading.
- Provide trading platform. An installable software or browser based.
- Call and trade facility.
- Issue contract notes for transactions
- Facilitate the funds between trading and bank account.
- Back office login – to see the summary of your account
- Customer care support
- Return report for financial year
- Depository & Depository Participant
- NSDL (National Securities Depository Limited)
- CDS (Central Depository Services (India) Limited)
A registered stock exchange provides a stock broker license, to a corporate entity called stock broker. This corporate entity is registered directly by the stock exchange as a trading member. There are several eligibility criteria a corporate entity has to fulfil before it can get a broker license.
For individual trader/investor, a stock broker is a gateway to stock exchange. You should open a trading account with a stock broker who meets your requirement.
Zerodha, a discount broker in India is currently very popular because of it’s transparent and lowest brokerage in the country. Its brokerage is Rs 0 (free) for delivery and 0.01% or Rs 20 whichever is lower for intra-day. It also offers a brokerage calculator, which lets you calculate the brokerage before trading/investing. You can open your account directly on zerodha website.
A trading account is an account which keeps your funds to buy/sell security from stock market. For delivery, you can only use the money available in the trading account. Brokers also provide margin for trading. Margin means you can trade for more than the money you have in your trading account. This margin varies scrip to scrip and broker to broker. Your intra-day will automatically get squared off before market close. In case you use it for delivery, you have to deposit the excess amount in the coming days (days vary from broker to broker). Failing to deposit the excess amount attracts a penalty from the broker. Thus it is advised to not use the margin for delivery. Use it for intraday and close your trading the same day. Brokers charge a fee for their services, collectively called as brokerage.
Basic services provided by the brokers include –
A share is theoretically a % ownership in the company. You need to have some proof that you have bought shares of a company. This proof is written format which is an authorization that you have bought a certain amount of shares of a company. previously this used to be in paper format. These paper formats were difficult to keep as needed proper maintenance. This problem was solved in 1996 when share was dematerialised and these dematerialized (digital format) were termed as demat form. These demat shares need an electronic place to be kept safely. For this need, a demat account was introduced.
A depository is a financial intermediary which offers service of demat account. This demat account is a digital vault for electronic shares.
Trading and demat account are interlinked. Currently, in India, there are only two depositories providing service of demat account.
There is virtually no difference between the two and both operate under strict guidelines of SEBI.
Just like we can not go to the stock exchange for trading. We need a broker to do that. In the same way for the demat account, a depository participant (DP) is required. A DP acts as an agent to the depository. DP is also governed by SEBI rules.
When you open a trading account, your broker offers a demat account as well. Thus your trading and demat account are linked by the broker. You need not worry about that.
A bank as a financial intermediary of stock market facilitates funding to-fro trading account. This means you can transfer funds to your trading account directly from your bank. In the same way you can transfer you money back to your bank directly from the trading account.
You can map only one bank account to your trading account at a time.
Financial intermediary, clearing corporations are wholly owned subsidiaries of NSE & BSE. The job of a clearing corporation is to make sure that all the trades are closed successfully. Means if there is a buyer buying X share at Rs 1, there should be a seller selling at Rs 1.
There are two clearing corporation in India viz.
- NSCCL (National Security Clearing Corporation Ltd)
- ICCL (Indian Clearing Corporation)
NSSCL is clearing corporation of NSE and ICCL is of BSE.
Role of a clearing corporation
- Find the buyer and seller and complete the trade by matching debit and credit process.
- Neither buyer nor seller should default. Means after transaction is made none of both can back out.