Stock market participants & financial intermediaries?

In sports, we have various participants; just like in cricket we have bowlers, batsmen, fielders, umpire, and commentators, similarly in stock markets there are some participants who transact in the market.

Retail participants:

Retail investors are people like you and me, who invest in the market to make profit.

Domestic institutional investors (DII):

Domestic Institutional Investors are large corporate entities in India who transact in financial Markets.

Foreign institutional investors (FII):

Foreign Institutional Investors are corporate entities based outside India.

Asset management companies:

These are mutual fund companies such as SBI Mutual Fund, HDFC Mutual Fund etc.

Now as there are so many participants in the stock markets, there has to be an entity that regulates all these participants. Just like students are regulated by their teachers, teachers are further regulated by the college. There must be some rules and guidelines to be followed by all these participants.

In India the stock market is regulated by the Securities and Exchange Board of India (SEBI). What does SEBI do, you may ask? SEBI promotes the development of stock exchanges, regulates market activity of all participants, make sure that the small retail investors are protected and not cheated. In a nutshell, SEBI ensures…

The stock exchanges (BSE and NSE) conducts its business fairly Stock brokers and sub brokers conduct their business fairly Participants don’t get involved in unfair practices Corporate’s don’t use the markets to unduly benefit themselves (Example – Satyam Computers) Small retail investors interest are protected Large investors with huge cash pile should not manipulate the markets Overall development of markets

Financial intermediaries

From the time you buy a stock, until it enters your DEMAT account, there are many corporate entities involved which run through many processes. These entities work behind the scenes and follow various guidelines which are laid down by SEBI. These entities are called financial intermediaries and work independently to serve the investors.

1)Stock broker

You can’t directly buy and sell your stocks through the exchange. You need to first open something called as a ‘Trading Account’ and ‘Demat Account’ with a stock broker. The stock broker will provide you the platform to buy and sell your stocks.

A trading account lets you carry financial transactions in the market as all your money you invest is kept in the trading account. Demat account serves the purpose of holding your shares in electronic format.

So, let’s say you get up one morning and want to buy shares of Reliance as you get the news that Ambani has announced that Reliance Jio has overtaken Airtel and Vodafone to be the number 1 telecom company. So, assuming you already have a trading account, you would need to interact with your broker. Here are a few set standards to interact with your broker.

You can either call your broker or tell him to do it on your behalf. He would buy the shares and give you confirmation of the same over the call.

Your broker can even give you access directly to the market through something called a ‘Trading Terminal’. Broker will give you a trading ID and password from which you can view live price quotes and place orders for yourself.
Services provided by brokers are as follows:
  • Provides trading terminal so you can buy and sell your stocks.
  • Issue contract notes for the transactions – A contract note is a written confirmation detailing the transactions you have carried out during the day
  • Facilitate the fund transfer between your trading and bank account
  • The broker charges a fee for the services that he provides called brokerage.
  • The brokerage rates vary, and it’s up to you to find a broker who strikes a balance between the fee he collects versus the services he provides.

2)Depository and depository participants

When you buy a property the only way to identify you as the owner is if you present the required documents stating you as the owner of the property.

Similarly, when you buy shares of a company, you are given a share certificate which claims that you are the owner of those particular shares of the company

Post 1996, shares were in physical form, where you were literally given a physical share certificate. However, post 1996, physical share certificates were converted into digital format called dematerialization often referred to as DMAT Account For e.g.: If you decide to buy the shares of reliance, all you need to do is open your trading account, look for the prices of reliance, decide the quantity and buy it. The amount gets debited from your account. Post that the shares come and sit in your Demat account after 2 Days.

There are two depositors in India. They are the National Securities Depository Limited (NSDL) and Central Depository Securities Limited. They are also governed by SEBI rules and regulations.


How would you receive money in your trading account? Well you cannot directly deposit money in your trading account. This is where banks come into the picture. Your saving bank account is linked to your trading account. So anytime you are short of funds, you can transfer funds from your bank account to trading account.

Also, at this stage, you must have realized that the three financial intermediaries operate via three different accounts – trading account, DEMAT account and Bank account. All the three accounts operate electronically and are interlinked.

Bank like ICICI Bank, HDFC Bank offer 3 in 1 account. So they open your trading account, bank account and Demat account all together.

National Security Clearing Corporation Ltd and Indian Clearing Corporation are wholly owned subsidiaries of National Stock Exchange and Bombay Stock Exchange respectively.
The job of the clearing corporation is to ensure guaranteed settlement of your trades/transactions. For example, if you were to buy 1 share of Biocon at Rs.446 per share there must be someone who has sold that 1 share to you at Rs.446. For this transaction, you will be debited Rs.446 from your trading account and someone must be credited that Rs.446 toward the sale of Biocon.
In a typical transaction like this the clearing corporation’s role is to ensure the following:
Identify the buyer and seller and match the debit and credit process.
Ensure no defaults – The clearing corporation also ensures there are no defaults by either party. For instance, the seller after selling the shares should not be in a position to back out thereby defaulting his transaction.
It’s ok not to know much about NSCCL or ICCL simply because, you as a trader or investor would not be interacting with these agencies directly. You just need to be aware that there are certain professional institutions which are heavily regulated, and they work towards smooth settlement, and efficient clearing activity.