What are Financial Intermediaries?

From the time you buy a share in the stock market till that share comes in your demat account, many types of Corporate Entities i.e. many organizations are working in the backend, so that this work gets done properly. These entities working behind the scenes make your transaction possible as per the rules and regulations of SEBI so that you do not face any problem. These entities are known as Financial Intermediaries.

These intermediaries are dependent on each other’s work and together they create the ecosystem without which the financial market is impossible to run. In this chapter you will be told about these intermediates.

The Stock Broker

The Stock Broker is probably the most important intermediary of the stock markets, without knowing about it your can’t work in stock markets. It is a corporate entity which is registered as a trading member of the stock exchanges and has a stock broking license. And they work under the guidelines of SEBI. In another words, a stock broker is the door to the stock markets for common people.

To enter the stock markets, you need to open a trading account with a broker. You can choose the broker of your choice. It is only Your trading account which is also called a demat account with your broker through which you can buy or sell shares.

So let’s say you have opened a trading account and want to buy or sell a stock. for this you need to approach your broker, what are the ways to do it? You yourself go to the broker’s office and meet the dealer sitting there and tell him what you want to deal with. The dealer sits there is only to fulfill such orders. You can also make a call to your broker & place your order after providing your identity & client code. After this the dealer will complete your order through an online terminal.

You can also do the deal yourself. Through a trading terminal software provided by your broker. All you need to do is to log in to your demat account and you will be able to see the live prices of the stocks itself and can place the order. It is actually the most preferred method.

The broker gives you some essential features, such as:

• Facility to buy and sell shares in the market.
• Margin for trading. We will discuss this in detail later.
• If you want to trade over the phone then there the broker will help you.
• Also software support is available, so that there is no problem in your trading.
• Issuance of contract notes for each transaction. This note is a written proof of the transaction of that day.
• Transfer money between your bank account and trading account.
• Creating a back office login, so that you can see complete information about your account.
• The broker charges you a fee for these facilities provided by him, which is called brokerage charge. These fees vary from broker to broker. You have to choose a broker that has the right balance of fees and features.

Depository and Depository Participants

When you buy a property, you keep its papers with you so that when the time comes, you can show when and from where you bought it. That’s why it is important to keep the paper in a safe place.

Similarly, when you buy shares (which is actually your stake in that company), you need to keep a share certificate to prove your stake. Because in it all the information is written that how much share of the company you have. Till 1996, share certificates were of paper. But since then share certificates started being issued digitally. The process of converting paper shares into digital is called dematerialization which came to be known as Demat for short. After 1996, there was a need to hold these demat shares digitally and since then a demat account has become necessary.

Depositories were created to provide the facility of demat account. The depository works in your demat account to hold all your shares in digital form. You can also consider it as your digital vault. The trading account opened with your broker and the demat account opened with the depository are interlinked. For example, if you want to buy Infosys shares, you would log in to your trading account, enter your price and place a buy order and buy the shares. After coming here the work of trading account is over. After this the shares of Infosys will automatically come in your demat account. Similarly, while selling you have to place the share price and order on the trading account and the shares will be automatically debited from your demat account.

At present, there are only two depositories in the country offering demat account service. NSDL stands for National Securities Depository Limited and CDSL stands for Central Depository Services- India- Limited. Both have the same service and both work under the rules of SEBI.

Just like you go to a broker to open a share trading account, not NSE or BSE, similarly to open a demat account, you will not go to NSDL or CDSL, you will go to a Depository Participant- DP. These DPs act as an agent of the depository to open your account and are subject to SEBI regulations.

Banks

In the case of the stock market, the role of the bank is quite straightforward. They transfer money from bank to trading account and from trading account to bank. For this, it is necessary to have the same name in the trading account and the bank account. You can link multiple bank accounts to your trading account. For example, Zerodha has the facility to link one primary bank account and three secondary bank accounts to your trading account. You can put money from any of these bank accounts to buy shares. But while selling, the money will go to the primary bank account only.

Your primary bank account is also linked to your trading account, depository and registrar and transfer agents (RTAs). So trading, bank and depository accounts are interconnected electronically so that you can easily transact.

NSCCL and ICCL

National Securities Clearing Corporation Limited (NSCCL) is a subsidiary of National Stock Exchange (NSE) and Indian Clearing Corporation Limited is a subsidiary of Bombay Stock Exchange. Their job is to settle every transaction that happens on the exchange. If you have bought one share of Biocon at Rs 446, then someone must have sold you this share for Rs 446. The job of the Clearing Corporation is to ensure that the shares move from the seller’s demat account to the buyer’s demat account. And the money goes out of the buyer’s bank and into the seller’s bank account.

So overall the Clearing Corporation does the following in any transaction:

• Identifying buyers and sellers and adding money and shares to their accounts.
• Ensuring that the deal is completed and that neither party backs out of the deal.

However, it is not necessary for any investor to know in detail about the Clearing Corporation. He will never get to work directly with them. He should only know that a professional organization is doing this work with full rules and regulations.

Important points of this chapter:

• In the market, many intermediaries do different work, due to which they form a complete system so that the market can work smoothly.
• Your entry into the stock market is through a broker. Therefore, it is important that you choose the right broker keeping in mind your need and convenience.
• The broker gives you the facility of trading account through which you can buy or sell shares.
• A depository is an institution that holds your shares in digital form and creates your demat account for it.
• There are two depositories in the country NSDL and CDSL. To open a Demat account, you need to approach a Depository Participant. He works as an agent of the depository. Clearing Corporation is responsible for clearing and settling your transaction.