Different types of stock market participants
The different types of stock market participants bring together the two most important participants which include:
- Primary market (where securities are issued for the first time): The issuer of securities and the investors. A security is a product that has some financial value in the form of shares, fixed income, gold etc.
- Secondary market (where already issued securities are traded): The buyers and seller of securities
In this article, we will understand the different types of stock market participants and the role they play in achieving your financial goals.
As an investor, do you wish to either:
- Apply for new securities like equity shares, fixed income products issued by a company or Government in the primary market, or
- Buy or sell securities like equity shares, fixed income products, etc. that are already being traded in the secondary market
In both the above cases, you will need to have a trading and Demat account. A stockbroker can facilitate the opening of a trading and Demat account. The buying and selling of any securities on a stock exchange like BSE or NSE can be done only through a stockbroker.
Depending on your need, a stock broker can provide you:
- A trading and demat account, or
- A trading, demat, and bank account
A stock broker charges brokerage as a transaction fee for securities transactions. The transaction fee may be a percentage of the transaction amount or a flat amount.
Some of the well-known stock brokers include:
- Bank-backed stock brokers like ICICI Securities, HDFC Securities, Kotak Securities, etc.
- Independent or third party stock brokers like Motilal Oswal, Angel Broking, Edelweiss, IIFL Securities, etc.
Digital or discount stock brokers like Zerodha, Upstox, Paytm Money, Samco
Stockbrokers that serve large institutions are known as institutional stockbrokers.
Modes of placing orders: You can do a securities buy/sell transaction through a stockbroker using any of the following modes:
- Visiting the stock broker’s office
- Calling the broker’s customer care
- Logging into your trading account on the broker’s website
- Logging into your trading account using the broker’s mobile app
Other services offered: Apart from the most important service of facilitating buying and selling of securities, stock brokers also offer other services to their clients.
Some of these other services include:
- Advisory services: Stock brokers provide research reports to their clients. These reports include stock specific fundamental and technical analysis reports, sector/industry reports, overall market analysis reports, etc.
Investment products: Stock brokers also provide other investment products like mutual funds, bonds, etc. to their clients
In the above section, we saw how a stock broker facilitates the opening of a demat account. However, the demat account is opened and maintained by another market participant which is the depository.
The two biggest depositories in India are:
- Central Depository Services Limited (CDSL)
- National Securities Depository Limited (NSDL)
Demat account management: Based on your transactions, a bank manages money (debit/credit) in your bank account. Similarly, based on your transactions, a depository manages shares and other securities (debit/credit) in your demat account. When you buy shares, the depository will credit shares to your demat account. When you sell shares, the depository will debit shares from your bank account.
Other services: Depositories also provide other important services like:
- The credit of IPO shares: The depository credits the shares allotted in an IPO to the demat account of the beneficiary.
- Cash corporate actions: Whenever an issuer of securities has to pay a dividend to shareholders or interest on debt securities, they can get the data of eligible shareholders/debt security holders from the depositories
- Non-cash corporate actions: When a company declares bonus shares or announces a rights issue, it decides the entitlement of eligible shareholders based on the data provided by depositories
Sending the CAS to account holders: The depositories send a monthly consolidated account statement (CAS) to all demat account holders. The CAS has the details of all securities held in the account and the buy/sell transactions done during the month.
In the above section, we saw how a depository debits/credits shares from/to a demat account. The instructions for the debit/credit are determined and given by the clearing corporation. The two important clearing corporations are:
- NSE Clearing Limited (formerly known as National Securities Clearing Corporation Limited or NSCCL) that handles the clearing and settlement of all trades executed on the NSE
Indian Clearing Corporation Limited (ICCL) that handles the clearing and settlement of all trades executed on the BSE
Clearing and settlement: The clearing corporation determines the obligation and discharges it through settlement. During the clearing and settlement process, the clearing corporation determines what the members are due to deliver/receive on the settlement date.
For example, you place an order for buying 100 shares of ITC at Rs. 200/share. During the clearing and settlement process, as determined by the clearing corporation:
- Your trading account/bank account will be debited by Rs. 20,000 and the demat account will be credited by 100 ITC shares
- The seller’s trading account/bank account will be credited by Rs. 20,000 and the demat account will be debited by 100 ITC shares
Counterpart: The clearing corporation also plays a very important role as a counterparty to the trade. In the above example, if the seller is unable to deliver the 100 ITC shares, then the clearing corporation will step in and deliver them to the buyer on behalf of the seller. Similarly, if the buyer is unable to make the payment, the clearing corporation will step in and make the payment to the seller on the behalf of the buyer.
An investor can invest in stock markets through various financial intermediaries such as:
Mutual funds: A mutual fund, under various schemes, pools money from investors and invests it on their behalf. Every scheme offered by a mutual fund has a stated objective and the fund manager invests as per it. Investors who are aligned to the scheme objective invest in it. Every investor is allotted scheme units in proportion to the amount invested.
The unit net asset value (NAV) moves up/down as per the value of the underlying securities. The income/gains generated by the scheme are shared with the unit holders in proportion to their holdings. An investor can invest in lumpsum or Systematic Investment Plan (SIP) mode.
Hedge funds: A hedge fund is a private investment partnership or offshore investment corporation that uses a wide variety of trading strategies including short-selling, derivatives and leverage. A hedge fund has a relatively high minimum investment limit (usually USD 1,00,000 or higher) and has an investor base comprising wealthy individuals and institutions.
A hedge fund pays a performance fee to its managers. They are not required to be registered with SEBI and also don’t have to disclose the net asset value (NAV) of their funds.
Portfolio Management Services (PMS): PMS is a service provided by a corporate body in which it gets into a contract with a client to manage his/her investment portfolio. The minimum investment required for availing PMS is Rs. 50 lakhs.
The portfolio manager can invest the client’s money in various securities as specified by SEBI. The PMS charges fees as per agreement with the client, which can be a fixed amount or performance-based fee or a combination of both.
- Mutual funds: A mutual fund, under various schemes, pools money from investors and invests it on their behalf. Every scheme offered by a mutual fund has a stated objective and the fund manager invests as per it. Investors who are aligned to the scheme objective invest in it. Every investor is allotted scheme units in proportion to the amount invested.
An investor can learn about various financial products through various knowledge platforms. Some of these include:
- Personal finance websites: These websites cover business news as well as personal finance news. Some of these include Moneycontrol.com, Valueresearchonline.com, Equitymaster.com, Capitalmind.in, Getmoneyrich.com, etc.
- Magazines: Some of these include Dalal Street, Moneylife, Capital Market, Forbes India, The Economist, Outlook Money, Business India, etc.
- Business newspapers: Some of these include The Economic Times, Business Standard, ET Wealth, The Financial Express, Mint, Business Line etc.
Business news channels: Some of these include CNBC TV18, ET NOW, BTVi, Zee Business, NDTV Profit, etc.
Apart from the above, other knowledge platforms include YouTube channels, audio podcasts, financial literacy seminars, webinars, books, etc.
While you can learn about investments from the above knowledge platforms, none of them can replace the role of a financial advisor. With Glide Invest, you can plan and systematically invest towards your financial goals. You will get guidance for:
- A personalised risk profile assessment
- Identifying your financial goals
- Appropriate asset allocation
- Making a financial plan for each goal
- Automating the financial plan
- Review and analysis of your financial plan
- Hand holding you till your financial goals are achieved