The stock market ecosystem is made up of several intermediaries which are regulated by SEBI. To the newbie investors and borrowers who are not financial experts but want to take part in financial markets, these financial intermediaries act as convenient platforms to trade. Moreover, they help investors manage risk by analysing and interpreting the risk to reward ratio to provide a safer and more secure manner of investment.
Financial intermediaries are institutions that act as a link between two parties to a financial transaction. An investor must know about the several types of intermediaries and the role they play in the stock market.
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Financial intermediaries are institutions that act as a link between two parties to a financial transaction. An investor must know about the several types of intermediaries and the role they play in the stock market.
Financial intermediaries in the stock market
The financial markets are divided into the primary and secondary markets and so are the intermediaries:
Intermediaries in the primary market
Merchant banker: They are a unique combination of banking and consultancy and usually offer their services to large enterprises and individuals of high net worth.
For companies releasing their IPOs, a merchant banker’s role is to review a company’s strategy, structure, and functioning and help in corporate restructuring. After reviewing, they draft a prospectus and application form that needs to be submitted to SEBI for seeking approval in being able to list stocks on exchanges.
They also look into all the compliance formalities and are responsible for appointing registrars. Registrars take care of activities such as collecting and recording investor applications, determine the allotment of shares and keep a track of money received from investors or money paid to sellers of shares.
Merchant bankers also help to buy and sell securities in the stock exchange on behalf of their clients, conduct research on equity markets and help in the growth of primary markets by ensuring capital flow.
Underwriters: Underwriters are appointed by companies in consultation with merchant bankers. When a new company wants to list its stocks, an underwriter determines the risk and price of a particular stock. If by any chance, the available shares of the initial public offering remain not sold, they agree to buy all the shares to sell in the market in return for a premium amount paid by the issuer company.
Investors benefit a lot from the underwriting process as the information provided by an underwriting agency can help them make a more informed buying decision.
Intermediaries in the secondary market
Portfolio manager: A portfolio manager with a team of analysts and researchers is responsible to create and manage an individual’s investment allocations. They use their knowledge and skills to select the right kind of investment instrument for their client to invest either in mutual funds, ETFs, stocks, etc. Some managers of portfolios work with individuals and families, while others focus on institutional or corporate investors.
They buy and sell securities via an investor’s account to maintain a specific investment strategy or objective over time.
Asset management firms: Asset management companies are firms that collect funds from various individual and institutional investors and invest in various securities such as stocks, bonds, real estate. They own a dedicated team of fund managers who manage the investment and the research team selects the right stocks or securities to invest in.
Fund managers identify investment options that align with objectives. For instance, if the fund objectives are to receive steady returns with low risk, then the appropriate investment option will be to invest in bonds issued by government firms or private firms. If the fund’s objective is to get maximum returns then the investment will take place in equity markets for investing in shares.
Securities: Also known as clearing corporations that are wholly owned subsidiaries of NSE and BSE. The role of a securities intermediary is to ensure all trades are happening under complete transparency by finding the buyer and seller pair completing the trade by matching the debit and credit process. Neither the buyer nor the trader should default. It means that if X number of stocks of Rs 10 is sold, there should be a seller who has bought those X shares at Rs 10.
Although intermediaries in the stock market help to create efficient markets and lower the cost of business, retail investors, especially the active ones that have portfolio managers or invest in asset management companies should be careful about the fees or commission charged to ensure that the expense ratio does not impact the returns.
