Trading has become easy as pie with the advent of technology. But from the time you place a trade to the securities getting credited to your Demat account, several entities are responsible for the seamless flow of your transaction. These entities are the financial intermediaries of the stock market. Let us learn about a few in this article.
The SEBI Act, 1992, broadly mentions stockbrokers, authorised persons (sub-brokers), share transfer agents, bankers to an issue, trustees of trust deeds, issue registrars, merchant bankers, underwriters, portfolio managers, investment advisers, depositories, custodians of securities, foreign institutional investors, credit rating agencies as ‘Intermediaries of SEBI’.
Of the many intermediaries, let us learn about the four intermediaries you will have to deal with often,
– Stock Brokers
– Depository and Depository Participant
– Clearing Corporations
As per SEBI mandate, only stockbrokers can execute a trade on exchanges. So, you’ll need to place your orders through a stockbroker. A stockbroker is an intermediary responsible for mediating between the bourse and the trader.
A corporate entity must fulfil the criteria laid down by the exchanges to obtain a license to become a stockbroker. Find more about the stockbroker here.
To trade in stocks, you will have to open a trading account with a stockbroker.
2. Depository and Depository Participants
Companies allot share certificates to their investors to authenticate their partnership with the company to the extent of shares bought by them. Earlier, the companies issued physical share certificates. But they have now been converted to digital format and are transferred directly to the Demat account. This process is more convenient and transparent. Converting physical share certificates to digital format is called ‘Dematerialisation’, often abbreviated as DEMAT.
To ensure accessible and secure storage of electronic share certificates, Depository came into existence. They are governed and regulated by SEBI. Depositories store the dematerialised share certificates in a dedicated account called a DEMAT account. It is responsible for holding the records of all the securities in digital form and manages and regulates all the DEMAT accounts.
Like a stockbroker, a Depository Participant (DP) is also an intermediary, mediating between the Depository and investor. A DP is an agency of Depository that lets you set up a DEMAT account.
At present, there are two depositories in India,
1. National Securities Depository Limited(NSDL)
2. Central Depository Service Limited (CDSL)
You need to transfer funds to your stockbroker to buy shares. The stockbroker credits funds to you when you sell shares. For the fund transactions between you and your stockbroker, you need a bank account. Hence, banks are one of the critical intermediaries that facilitate fund transfer in capital markets.
You can link multiple bank accounts to your Angel One trading account to transfer funds. While withdrawing, Angel One gives you the option to select a bank account in which you want to receive the funds. The amount will get credited to the bank account you have chosen. Angel One allows the online transfer of funds to your trading account via net banking and UPI.
4. Clearing Corporations
We know that banks establish a clearinghouse to settle mutual claims. Likewise, in capital markets, Clearing Corporations ensure that the trade is closed between two parties.
For instance, person A wants to buy 100 shares of XYZ company at Rs 100 per share. Meanwhile, B wants to sell 100 shares of XYZ company at Rs 100 per share.
Clearing Corporation plays the following roles to complete the trade:
– Identifies buyers and sellers matching their ask and bid process
– Acts as a seller to A and buyer to B, guaranteeing the trade, ensuring no default. It also maintains funds to assure transactions in the event of a default
– It ensures funds get credited to the B and shares are credited to the DEMAT account of A
Clearing Corporations prevent defaults by ensuring that buyers have the necessary funds to pay for their trades and sellers have the assets they intend to sell. They are the intermediaries responsible for the credibility of the market ecosystem.
The two primary clearing corporations, the National Security Clearing Corporation Limited (NSCCL), is a subsidiary of the National Stock Exchange, and the Indian Clearing Corporation Limited (ICCL), a subsidiary of the Bombay Stock Exchange.
The intermediaries handle different operations and work interconnectedly to ensure the seamless functioning of the securities market. Through these entities, SEBI regulates the market functions.
More entities have other workings in the market. Stay tuned to know about them in our upcoming articles.