Table of Contents
3.1 Brief description
From the time you buy a share in the stock market till the time that share comes to your Demat account, many types of corporate entities are working in the backend, so that this work is 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 problems. These entities are known as Financial Intermediaries.
These intermediaries depend on each other’s work and together they form an ecosystem without which it is impossible for the financial market to function. In this chapter, you will be told about these intermediaries.
Broker or Dalal is probably the most important intermediary of the stock market, without knowing about it your work will not work. It is a corporate entity that is registered as a trading member in the stock exchange and has a stock broking license. And they work under the rules of SEBI.
In a way, a stockbroker is a door to the stock market for you. To get into the stock market, you need to open a trading account with a broker. You can choose a broker of your choice or choice.
Your trading account is with your broker through which you can buy or sell shares.
So suppose you have opened a trading account and you want to place a deal for which you have to contact your broker then what are the ways?
- You personally go to the broker’s office and meet the dealer sitting there and tell him what you want to deal with. The dealer just sits there to fulfill such orders.
- You can call your broker, and place your order after giving details like your ID, and client code. The dealer will then complete your deal. Then will tell you on the phone itself that your order has been completed.
- You can also do the deal yourself. Through trading terminal software. You just have to log in on your computer and you will be able to see the live price of the share and place the order yourself. That’s why it is the most preferred method.
The broker gives you some important features, such as:
- Facility to buy and sell shares in the market.
- The margin for trading. We will discuss this in detail later.
- If trading is to be done over the phone then the broker will help you there. Also, the software supports so that there is no problem in your trading.
- Issuance of contract notes of each transaction. This note is the written proof of that day’s transaction.
- Transfer money between your bank account and trading account.
- Creating a back office login, so that you can view your complete account information.
- For these facilities provided on his behalf, the broker charges a fee from you which is called a brokerage charge. These fees differ with each broker. You need to choose a broker that has the right balance of fees and features.
When you buy a property, you keep its papers so that when the time comes, you can show when and where you bought it. That’s why it is important to keep the paper in a safe place.
Similarly, when you buy shares (which are actually your stake in that company) you need to retain the share certificate to prove your stake. Because in that, all the information is written that how many shares of the company you have.
Till 1996, the share certificate was 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 short.
After 1996 the need arose to hold these Demat shares digitally and since then a Demat account became essential. The depository was created to facilitate the Demat account. Depository works to keep all your shares in digital form in your Demat account. 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 linked. For example, if you want to buy Infosys shares, you will log in to your trading account, enter your price and place a buy order, and buy the shares. After coming here, the trading account work is over. After this, the Infosys shares will automatically be credited to your Demat account.
Similarly while selling you have to put 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 services. NSDL i.e. The National Securities Depository Limited and CDSL i.e. Central Depository Services Limited (Central Depository Services- India- Limited). Both provide the same service and both work under the rules of SEBI.
Just like you go to a broker and not NSE or BSE to open a share trading account, similarly, you go to a Depository Participant (DP) and not NSDL or CDSL to open a Demat account. These DPs act as agents of the depositories for opening your account and are subject to SEBI regulations.
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 your multiple bank accounts to your trading account. For example, on Zerodha, there is a facility to link one primary bank account and three secondary bank accounts to your trading account. You can deposit money from any of these bank accounts to buy shares. But while selling the money will go only to the primary bank account. Your primary bank account is also linked to your trading account, depository, and registrar and transfer agents (RTA).
So the trading, bank, and depository accounts are linked electronically so that you can transact easily.
National Securities Clearing Corporation Limited (NSCCL) is a subsidiary of the National Stock Exchange (NSE) and Indian Clearing Corporation Limited (BSE) is a subsidiary of the Bombay Stock Exchange. Their job is to settle every deal that happens on the exchange. If you have bought one share of Biocon at Rs.446, then someone would have sold you this share for Rs.446. The job of the Clearing Corporation is to ensure that the shares move out of the Demat account of the seller and reach the Demat account of the buyer. And the money is transferred from the buyer’s bank to the seller’s bank account. So overall the clearing corporation does the following in any transaction:
- Identifying the buyer and seller and adding money and shares to their accounts.
- To ensure that the deal is completed and that neither party backs out of the deal.
Well, it is not necessary for any investor to know about the clearing corporation in great detail. He will never be able to use them directly. He should only know that a professional organization is doing this work with complete rules and regulations.
Important points of this chapter:
- Many intermediaries do different things in the market, with the meeting of which a complete system is formed so that the market can function smoothly.
- The way to enter the stock market is through a broker. Therefore it is important that you choose the right broker keeping in mind your needs and convenience.
- The broker gives you the facility of a trading an 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 the same.
- There are two depositories in the country, NSDL, and CDSL.
- You need to approach the Depository Participant to open a Demat account. They act as agents of the depositories.
- The Clearing Corporation is responsible for clearing and settling your trades.