Financial Intermediaries  

Types of Financial Intermediaries

 

Financial Intermediaries play their role quietly behind the scenes, always complying with the rules  laid out by SEBI and ensure an effortless and smooth experience for your transactions in the stock  market. Together, these financial intermediaries, interdependent of one another, create an  ecosystem in which the financial markets exist. 

 

1. The Stock Broker 

A stockbroker is a corporate entity, registered as a trading member with the stock exchange and  holds a stockbroking license. They operate under the guidelines prescribed by SEBI. A  stockbroker is your gateway to stock exchanges. First, you need to open a ‘Trading Account’ with  a broker who meets your requirements. A trading account lets you carry financial transactions in  the market. A trading account is an account with the broker, which lets the investor buy/sell  securities. If someone has a trading account, they need to interact with their broker to transact in the markets. The two major types of stock brokers are 

 

Full-Service Broker: A full-service broker offers a broad range of stock and share trading services  to the clients together with researching on different stocks and shares and presenting  recommendation on potential profit-making stocks. 

 

Their roles comprise researching the stock market in which the client wants to invest in, study  the trend and investigate the different patterns and offer recommendations on which stock the  client can invest it and consequently make a profit out of it. 

 

Other than offering advice, they also use their expertise in buying and selling different stocks  and shares and stay up to date on the progress taking place in the stock market. 

 

As full-service brokers carry out most of the work for their clients, their brokerage fee or  commission is generally high. 

 

Discount Broker: As contrasting to the full-service broker, a discount broker focuses only in  executing buying and selling orders for their clients. 

They perform the trade by charging a brokerage fee much less than what is paid for their full service counterparts. 

Such discount brokers do not offer any recommendations on the investment nor do they offer  any recommendations to their clients. 

 

2. Depository and Depository Participants 

The place where digital share certificates are stored is called ‘DEMAT Account’. It is like a digital  vault for shares. A Depository offers DEMAT account services. In India, National Securities  Depository Limited (NSDL) and Central Depository Services Limited (CDSL) are the only  depositories offering you DEMAT account services.

 

You cannot open a DEMAT account directly through a Depository but have to do it through a  Depository Participant (DP). A DP acts as an agent to the Depository, and helps you set up your  DEMAT account. DP is governed by the regulations laid out by the SEBI. The trading account  from your broker and the DEMAT account from the Depository are interlinked. 

 

3. Banks 

Banks play a very straightforward role in the market ecosystem. They help in facilitating the fund  transfer from your bank account to your trading account. You cannot transfer money from a  bank account that is not in your name. 

 

4. NSCCL and ICCL 

NSCCL – National Security Clearing Corporation Ltd and Indian Clearing Corporation are  wholly owned subsidiaries of National Stock Exchange and Bombay Stock Exchange. The job of the clearing corporation is to ensure guaranteed settlement of your  trades/transactions 

In a typical transaction like this, the clearing corporation’s role is to ensure the following:

a) Identify the buyer and seller and match the debit and credit process 

b) Ensure no defaults – The clearing corporation also ensures there are no defaults by either  party. For instance, after selling the shares, the seller should not be in a position to back out,  thereby defaulting in his transaction.