Understanding the Role of Financial Intermediaries in Capital Markets and How They Operate

Stock markets need people and entities to take charge of the day-to-day processes with procedural finesse. To meet such needs, financial intermediaries have been in force since the inception of SEBI (Securities and Exchanges Board of India) in 1992. These licensed individuals and entities take buying and selling orders from you and match them with the stocks available in the market to validate them. Therefore, you can rest assured that all your investments are directed towards legitimate ends, and there is zero chance of getting duped in the process.

• You cannot place orders in the stock market by yourself and seek the help of financial intermediaries like stockbrokers.
• Stockbrokers facilitate the buying and selling of stocks at the concerned exchange, providing various services to investors.
• The investments made on shares are recorded in depositories for transparency in the buying-selling process.

The financial intermediaries were introduced with the security of the investor’s assets in mind, as well as the promotion and regulation of the securities market in India. SEBI had these objectives in mind while establishing the role of financial intermediaries and the guidelines they had to adhere to.

Let us now take a look at the four types of financial intermediaries you will encounter while investing.

Stockbroker

Stockbrokers are licensed financial intermediaries who help you buy and sell stocks by placing an order with them. They are indispensable to the stock market because, without them, it would be nearly impossible to track, regularise, or validate registered stocks.

Stock brokers offer various services to the investors:

• Providing the latest market information, such as changes in rules and alerting them about upcoming payments.
• Facilitating investors to contact them via call so that market decisions can be promptly implemented.
• Giving them access to an interface (online or offline) where they can trade.
• Ensuring transparency and genuineness of all transactions under their supervision.

Stockbrokers work with different stock exchanges, such as the Bombay Stock Exchange (BSE), National Stock Exchange (NSE), and Calcutta Stock Exchange.

Depositories

Depositories have replaced the physical share certificates that were previously issued to investors as proof of their share ownership in a company. With the growing number of investors, handling physical share certificates became cumbersome, leading to the innovation of Demat accounts. A Demat account electronically records an investor's shares and securities, making it easier to manage investments, similar to how a savings account works for cash. In India, the National Securities Depository Limited (NSDL) and the Central Depository Services Limited (CDSL) are the two SEBI-approved depositories that facilitate the electronic storage and management of securities.

Banks

Banks are the most predictable of all financial intermediaries because, without a bank account, you would not be able to transfer or receive funds during your financial dealings at the stock exchange. Therefore, the involvement of banks ensures transparency in transactions and empowers SEBI to track every movement taking place at the exchange.

Clearing corporation

Clearing corporations act as the facilitators for seamless connection between buyers and sellers for trading. For instance, if you are interested in buying 200 shares of a company for Rs. 200 per share, you are apprised of relevant sellers offering these shares. If and after the deal is done, the clearing corporation efficiently transfers the relevant funds to the accounts of relevant individuals.

A standard procedure needs to be followed during investment.

• First, you need to place an order with a stockbroker responsible for financial dealings at a particular stock exchange. Notably, the stock you have selected might not be available at all exchanges and may be specific to a particular stock exchange.
• The market then tallies the purchasing amount you offered and the price that the seller quoted. Dealings take place if these two expectations match.
• At the end of the trading day, the broker ensures you receive the shares you want to buy, and the seller receives their quoted price.

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