Participants in the Share Market & SEBI (PDF)

Participants in the Share Market The stock market, in simpler terms, is an exchange where regular buying and selling of the shares of companies held in the public domain happen. The stock market participants can generally be categorised into a few groups. For example, investors, companies, traders,...

Participants in the Share Market The stock market, in simpler terms, is an exchange where regular buying and selling of the shares of companies held in the public domain happen. The stock market participants can generally be categorised into a few groups. For example, investors, companies, traders, stock exchanges, regulators, financial intermediaries, and stockbrokers. Here we will talk about how these participants actually participate and work around in the stock market. Investors Companies Stock exchanges Stockbrokers Regulators Financial intermediaries Clearing corporations Depository and depository participant Conclusion Investors The appeal of the stock market draws both individuals and corporations or organisations from a range of backgrounds. There are a few subgroups that investors are categorised in. Such as: Domestic institutions: This includes investors who mediate or undertake investments in the security field of financial assets of the country they are situated in. They are major investors in both primary and secondary markets. Asset management companies: Mostly mutual funds companies that invest their clients’ funds into securities matching their declared financial objective. Foreign Institutional Investors: This includes foreign AMCs, hedge funds, and other investors transacting in the stock market. They trade in large money and heavily influence market movements. OCI and NRI: Investors of Indian origin but based outside of the country. Companies Companies enlist themselves in the stock market through an IPO (Initial Public Offering). They get listed in the stock exchanges, after which the shares of the company are freely traded by market participants. They use the money raised from the IPO to meet their management costs and expand the business. Companies may also invest in other companies as institutional investors. Stock exchanges Stock exchanges are the facilitators of buying and selling securities. It is where the actual trade happens. They provide the issue and retrieval of securities, capitals, and other instruments. Securities traded in the stock exchange include many different products ranging from stocks listed by companies, bonds, derivatives, unit trusts, and other investment products. Stock exchanges are known for functioning as a continuous auction. Buyers and sellers are constantly in the process of transactions on the best floor price available. Investors, however, cannot directly deal with the exchanges. They need to go through stockbrokers or dealers who facilitate the trade. Stockbrokers Stockbrokers are registered entities that primarily act as a bridge between investors and the markets. One of the most important financial intermediaries, they buy and sell securities and stocks for both retail investors and institutional ones. They charge a fee or commission for the process and are usually associated with a brokerage firm. Regulators A third-party regulation organisation supervises the functioning of markets. SEBI, called the ‘Watch Dog of Indian markets,’ functions primarily to protect investors and ensure fair trading in the markets. A part of their job is to formulate and enforce a set of guidelines to regulate the market participants as well as the intermediaries. Financial intermediaries Financial intermediaries are entities that help facilitate transactions between two parties in the market. Banks, AMCs, etc., all fall under this category. They are the invisible backbone of the entire stock market ecosystem. In today’s world, with technology integrated through the internet and smartphones, one can easily open an account, deposit money, and even start trading through these intermediaries. Clearing corporations They ensure the fulfilment of your trades and transactions. Basically, they match the debit and credit process at the end to ensure the completion of the trade. The regulatory authorities strictly regulate these companies. Their main objective is to provide you with the right asset – either cash in case you are selling stock or shares in case you are buying – to balance the trade books and ensure smooth clearing activity. Depository and depository participant When you transact in shares, you are provided with a certificate that entitles you as the shareholder. Although these certificates were in paper formats earlier, they went digital in 1996. This conversion of the certificates digitally is called Dematerialization or Demat. The share ownership certificates are placed in your Demat Account, which works like a vault to keep a count of your stocks. There are only 2 depositories in India – CDSL (Central Depository Services Ltd) and NSDL (National Securities Depository Ltd) – who hold the Demat accounts. However, you can only access a Demat account with the help of a depository participant – your registered broker, sub-brokers, discount brokers, etc. They act as agents to the Depository and help you set up Demat accounts. Your Demat account and trading accounts are interlinked. Many key players work behind the scenes to make your stock market experience smoother. They follow rules and are regulated heavily by SEBI so as to protect the investors and ensure that any mishaps do not end up creating an upheaval in this ever-evolving industry. The Indian regulatory organisation, SEBI, has played a major role in maintaining the markets, protecting the investors, and creating an atmosphere conducive to more retail participation. All stock market participants function together, making markets one of the most dynamic places to earn money and profits. SEBI : POWERS & FUNCTIONS What is SEBI? SEBI stands for Securities and Exchange Board of India. It is a statutory regulatory body that was established by the Government of India in 1992 for protecting the interests of investors investing in securities along with regulating the securities market. SEBI also regulates how the stock market and mutual funds function. Objectives of SEBI Following are some of the objectives of the SEBI: 1. Investor Protection: This is one of the most important objectives of setting up SEBI. It involves protecting the interests of investors by providing guidance and ensuring that the investment done is safe. 2. Preventing the fraudulent practices and malpractices which are related to trading and regulation of the activities of the stock exchange 3. To develop a code of conduct for the financial intermediaries such as underwriters, brokers, etc. 4. To maintain a balance between statutory regulations and self regulation. Functions of SEBI SEBI has the following functions 1. Protective Function 2. Regulatory Function 3. Development Function The following functions will be discussed in detail Protective Function: The protective function implies the role that SEBI plays in protecting the investor interest and also that of other financial participants. The protective function includes the following activities. a. Prohibits insider trading: Insider trading is the act of buying or selling of the securities by the insiders of a company, which includes the directors, employees and promoters. To prevent such trading SEBI has barred the companies to purchase their own shares from the secondary market. b. Check price rigging: Price rigging is the act of causing unnatural fluctuations in the price of securities by either increasing or decreasing the market price of the stocks that leads to unexpected losses for the investors. SEBI maintains strict watch in order to prevent such malpractices. c. Promoting fair practices: SEBI promotes fair trade practice and works towards prohibiting fraudulent activities related to trading of securities. d. Financial education provider: SEBI educates the investors by conducting online and offline sessions that provide information related to market insights and also on money management. Regulatory Function: Regulatory functions involve establishment of rules and regulations for the financial intermediaries along with corporates that helps in efficient management of the market. The following are some of the regulatory functions. a. SEBI has defined the rules and regulations and formed guidelines and code of conduct that should be followed by the corporates as well as the financial intermediaries. b. Regulating the process of taking over of a company. c. Conducting inquiries and audit of stock exchanges. d. Regulates the working of stock brokers, merchant brokers. Developmental Function: Developmental function refers to the steps taken by SEBI in order to provide the investors with a knowledge of the trading and market function. The following activities are included as part of developmental function. 1. Training of intermediaries who are a part of the security market. 2. Introduction of trading through electronic means or through the internet by the help of registered stock brokers. 3. By making the underwriting an optional system in order to reduce cost of issue. Purpose of SEBI The purpose for which SEBI was setup was to provide an environment that paves the way for mobilsation and allocation of resources.It provides practices, framework and infrastructure to meet the growing demand. It meets the needs of the following groups: 1. Issuer: For issuers, SEBI provides a marketplace that can utilised for raising funds. 2. Investors: It provides protection and supply of accurate information that is maintained on a regular basis. 3. Intermediaries: It provides a competitive market for the intermediaries by arranging for proper infrastructure.