Journey of a Share

In this article, we will learn about the different financial intermediaries in Indian Stock Market and how they interact to ensure your transactions go through seamlessly.

Things to Know Before Your First Stock Market Transaction

A Vegetable and Fruits vendor enables us to buy an apple without interacting with the farmer. In other words, there needs to be a market for us to buy the fruits. This Market called as a “Vegetable mandi” where farmers come from nearby areas to sell their produce and government agents, private players, and individuals wholesale buyers come here to buy vegetables.

This is similar to a Stock Exchange, there are two main stock exchanges in India that make up the stock markets. They are the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). Here buyers and sellers can exchange shares via a bidding offer process.

Know the Ecosystem

Before we understand how this works lets place an order on a broker Terminal so that we can understand the journey of this single trade.

The above image is Zerodha’s terminal called Kite web platform, on this image there is a watchlist on left and chart on right.

The above image shows Last Traded Price (LTP) @2427.30. On the right we can see Bid Column which is basically all the people who placed orders to buy this stock at certain prices usually this is always lower than the LTP and then we have Offers on right where people have placed orders to sell this stock which is usually above the current LTP.

This is how price discovery happens people are bidding and offering stock at different prices and where there’s more pressure and trades take place, that’s how prices move in simple demand and supply, which can be seen in market depth.

Journey of a Trade.

Let’s assume we buy 10 shares of Reliance and see the journey of this trade one by one. For this shares to be credited to our Demat account a lot of market intermediaries are involved so let’s try to understand how that works.

Broker

We placed our order of Reliance using Zerodha’s kite web platform.
Some of the top brokers in india are as follows

• Zerodha
• Upstox
• FYERS
• Dhan
• Sharekhan
• Angel Broking
• India Infoline (IIFL)
• Motilal Oswal

Stock broker functions are as follow

1. A Stock broker is a corporate entity, registered as a trading member with the Stock Exchange.
2. Holds a stockbroking license.
3. Follow SEBI prescribed guidelines.
4. Let’s the investor buy/sell securities.
5. Orders can be placed online via web or mobile app.

Services Given by a Stockbroker

1. Access to markets. (letting us transact)
2. Provides margins for trading.
3. Dealing support for call and trade.
4. Issue contract notes for the transactions.
5. Facilitate the fund transfer between your trading and bank account.
6. Provide you with a back-office logins to see the summary of account.
7. Brokerage Charge (a broking fee also called brokerage for the services provided, its upto you as a client to figure out and get the right balance between the services you want to get and the brokrage charge you want to pay coz it varies form broker to broker).

After the broker the order is relayed to Stock Exchange.

Stock Exchange

There are two main stock exchanges in India that make up the stock markets.

1. The National Stock Exchange (NSE) and
2. The Bombay Stock Exchange (BSE).

Besides these two exchanges, there are many other regional stock exchanges like Bangalore Stock Exchange, Madras Stock Exchange that are more or less getting phased out and don’t really play any meaningful role anymore.

The buy and sell orders are placed and matched in the exchange, hence the name Stock Exchange. So bids flow in and offers flow in as explaned above in market depth. When we placed our order to buy Reliance a coresponding offer was matched and trade took place thats how we were able to buy those shares for Reliance.

So after the trade is exceuted it will now move to Clearing Corporation where the trade will actually get cleared.

Clearing Corporation

There are 2 Clearing Corporation in India

1. NSCCL (National Securities Clearing Corporation Limited) a wholly owned subsidiary of NSE
2. ICCL (Indian Clearing Corporation Limited) a wholly owned subsidiary of BSE

The Functions of Clearing Corporation is to make sure that after transaction takes place it actually goes through, which means that the account which needs to pay the money that is debited and shares gets credited to the account which is purchased the shares. So neither of the party (buyer or seller) default on transaction that took place.

In Summery we placed the order with the broker it was matched at the exchange and clearing corporation ensures that transaction takes place. Once the Clearing Corporation clears those shares the next step is the Depository.

Depository

The Depository is like a Digital Locker storing all of our shares Digitally. The broker and the Depository are deeply integrated which means when we bought those Reliance shares once they are credited to our account we will be able to see it on our broker terminal.
There are 2 Depository in India

1. NSDL (National Securities Depository Limited) a wholly owned subsidiary of NSE.
2. CDSL (Central Depository Services Limited) a wholly owned subsidiary of BSE.

The broker and the depository are interlinked to each other via a mechanism called Depository Participants, If you want to understand more on Depository Participants check this link.

So the Depository is the last step for the transaction of Reliance share we bought. This is where the shares will get credited and be reflected in our account (our broker terminal).

Now appart form this journey there are two other participants we need to know about in the ecosystem that’s the Bank and SEBI.

Bank

Banks play a very straightforward role in the market ecosystem. They help in facilitating the fund transfer from your bank account to your trading account and vice versa. You cannot transfer money from a bank account that is not in your name.

You can link multiple bank accounts to your trading through which you can transfer funds and trade. On Zerodha, you can add 1 primary bank account and up to 2 secondary bank accounts. You can use all the bank accounts to add funds, but withdrawals are only processed to the primary bank account.

Also, dividend payments, money from buybacks will be sent to the primary bank account. The primary bank account is connected to your trading account and with the Depository.

SEBI (Securities and Exchange Board of India)

SEBI is the financial regulator for the entire market which means all the participants from the broker,exchange,clearing corporation,depository are regulated by SEBI.

The objective of SEBI is to promote the development of stock exchanges, protect the interest of retail investors, and regulate market participants and financial intermediaries’ activities. In general, SEBI ensures the following:

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

All the rules and regulation are drafted and enforced by SEBI. You can the Guidelines around the market in this link on SEBI’s website. Banks on the other hand are regulated by RBI Reserve bank of India and not SEBI. The rules prescribed by the SEBI safeguard the investor and the trader.

The Stock Market Participants

The stock market attracts individuals and corporations from diverse backgrounds. Anyone who transacts in the stock market is called a market participant. The market participant can be classified into various categories. Some of the categories of market participants are as follows:

1. Domestic Retail Participants – These are people like you and me transacting in markets.
2. Domestic Institutions – These are large corporate entities based in India. A classic example would be the LIC of India, etc.
3. Domestic Asset Management Companies (AMC) – Typical participants in this category would be the Mutual Fund companies such as SBI Mutual Fund, DSP Black Rock, Fidelity Investments, HDFC AMC, etc.
4. Foreign Institutional Investors (Non-Indian corporate entities) – These could be foreign asset management companies,Foreign Banks, Hedge funds, and other investors.
5. NRI’s and OCI – These are people of Indian origin but based outside India.

Now, irrespective of the category of market participant, everyone’s agenda is the same – to make profitable transactions. More bluntly put – to make money.

When money is involved, human emotions in the form of greed and fear run high. One can easily fall prey to these emotions and get involved in unfair practices. India has its fair share of such twisted practices, thanks to Harshad Mehta’s operations and the like.

This is where SEBI ensure that people adhere to these regulations and compliance thereby making the markets a level playing field for everyone.