The Basics Of Stock Market

Lesson -> The Financial Intermediaries

3.1 The Overview

Many corporate entities actively participate in the process from the moment you access the stock market, let's say to purchase a stock, until the stocks arrive and hit your DEMAT account. These entities are quiet behind the scenes and follow the SEBI rules to ensure smooth and easy transactions in the stock exchange. These. entities are commonly referred to as Financial Intermediaries.

These financial intermediaries are interdependent and create an ecosystem that allows for the existence of financial markets. This chapter will give you an overview of these financial intermediaries and the services they provide

3.2 The Share Brokers

You should be familiar with the stockbroker as one of the most important financial intermediaries. A stockbroker is a company that has been registered with the stock exchange as a trading member and holds a stockbroking license. They follow the SEBI guidelines.

Stockbrokers are your gateway to stock exchanges. You will first need to open a "Trading Account" with a broker that meets your needs. It could be as simple a distance between the broker's office, your home, or a specific requirement. It can also be difficult to find a broker that can offer you a single platform from which you can transact on multiple exchanges around the globe. We will talk later about what these requirements might be and how to select the right broker.

Trading accounts allow you to make financial transactions on the market. An account with a broker that allows the investor to buy and sell securities is called a trading account.

Assuming you have a trading account, it is necessary to communicate with your broker whenever you wish to trade in the markets. There are several ways you can communicate with your broker.

  1. You can visit the broker's offices and speak to the dealer. These transactions are carried out by a dealer, an executive from the stock broker's offices.
  2. You can call your broker and identify yourself using your account code (client code), to place an order for your transaction. While you're still on the phone, the dealer at the other end will place the order and confirm its status.
  3. Do it yourself: This is the best way to transact in the markets. Through software called the 'Trading Terminal,' the broker grants you access to market data. Logging in to the trading terminal will allow you to view the live market price quotes and place your orders.

Brokers provide basic services such as...

3.3 Participants in the Depository and Depository

The only way to prove that you own a property when you purchase it is by presenting the property papers. It is important to keep the property papers safe and secure.

The only way to prove your ownership when you purchase a share (part ownership in a company), is to produce your share certificate. A share certificate is a document that entitles you to ownership of shares in a company.

The share certificate was originally in paper form before 1996. However, digital share certificates were introduced after 1996. The process of converting a paper-format share certificate into digital format is known as "Dematerialization", often abbreviated to DEMAT.

Digital storage is required for the DEMAT share certificate. The 'DEMAT account' is the storage location for the digital share certificates. The depository is a financial intermediary that offers the Demat account service. All shares purchased in electronic format will be stored in a DEMAT account. The DEMAT account is a digital vault that holds your shares.

As you may have guessed, trading accounts at your broker and the DEMAT account at Depository are interlinked.

If you want to buy Infosys shares then you only need to open a trading account, search for Infosys prices, and then buy them. Your trading account will be activated once the transaction has been completed. The shares of Infosys will be added to your DEMAT account immediately after you have purchased them.

You can also sell Infosys shares by opening a trading account. This completes the transaction. However, in the backend, your DEMAT account will be debited and your shares will move out.

Only two depositaries currently offer DEMAT account services. These are The National Securities Depository Limited and Central Depository Services India Limited (NDSL & CDSL respectively) and Both operate under strict SEBI regulations and are almost identical.

You cannot go into the National Stock Exchange to open a trading account. The same goes for opening a DEMAT account. You need to contact a Depository Participant in order to open a DEMAT bank account. The Depository Participant (DP) assists you in setting up your DEMAT account. The DP acts as an agent for the Depository. The regulations set out by SEBI govern even the DP, it is obvious.

3.4 The Banks

The role of banks in the market environment is very simple. They facilitate the transfer of funds from your bank account into your trading account. Transfer money to a bank account, not in your name is impossible.

Multiple bank accounts can be linked to your trading account. This allows you to transfer funds and trade. Zerodha allows you to add up to two secondary bank accounts. All bank accounts can be used to add funds. However, withdrawals are processed only to the primary account. The primary account will receive dividend payments and money from buybacks. Your trading account, your primary bank account, and the Depository are connected.

You will have realized by now that three accounts are used to operate the three financial intermediaries: trading account, demat account, and bank account. You will have a seamless experience with all three accounts as they are electronically interconnected.

  1. Let you have access to the markets and let you transact
  2. Margins for trading are required - This point will be discussed at a later stage.
  3. Support - If you need to trade or call, we can provide assistance. If you need software support, please contact us.
  4. Issue contract notes for transactions - A contract notice is a written confirmation of the transactions that you have completed during the day.
  5. Facilitate fund transfer between trading account and bank account
  6. You will be provided with a login to the back office. This login allows you to view the summary of your account.
  7. Brokers charge a fee for services provided. This is known as the brokerage charge or simply brokerage. Brokerage rates can vary and you will need to choose a broker that is able to balance the fees he collects with the services he offers.

3.5 The NSCCL & ICCL

NSCCL – National Security Clearing Corporation Ltd. and Indian Clearing Corporation, wholly-owned subsidiaries of National Stock Exchange or Bombay Stock Exchange.

Clearing corporations are responsible for ensuring that your transactions/trades are settled. If you buy 1 share Biocon at Rs.446 per share, someone must have sold the 1 share to you at Rs.446. This transaction will see you debit Rs.446 from the trading account and someone be credit Rs.446 towards the sale of Biocon. The clearing corporation is responsible for ensuring the following in a transaction such as this:
a) Identify buyer and seller, and match debit and credit processes
b) Avoid defaults - The clearing company also ensures that there are no defaults from either party. The seller shouldn't be able to rescind after selling shares and thus default in the transaction.

You don't have to know much about NSCCL or ICCL if you are not a trader or investor. It is important that you are aware of the fact that certain professional institutions are tightly regulated and work to ensure smooth settlements and efficient clearing.

To Summerize

  1. A group of financial intermediaries is responsible for creating the market ecosystem. Each one offers a unique service that helps markets function.
  2. Stockbrokers are your gateway to the markets. Make sure you select a broker that meets your needs and offers excellent services.
  3. Stockbrokers provide a trading account that can be used for all market-related transactions, such as buying and selling shares or other financial instruments.
  4. A Depository is an entity that holds shares electronically, for you. The 'DEMAT account is your account with the depository.
  5. India has only two depositories - NSDL or CDSL.
  6. You will need to establish a relationship with a Depository Participant in order to open a DEMAT account at one of the depositaries. A Depository Participant (DP) acts as an agent for the Depository
  7. Clearing corporations work towards the settlement and clearing of trades you have executed.