If we look at any business or institution, we will see that there are different units or department and set of people who contribute to enable the smooth functioning of the business and help the business flourish and grow with time. Similarly, several participants contribute to the stock market's smooth functioning. In this article, we will learn about different market participants but before that, let us briefly understand the concept of the stock market.
If we want to understand the stock market, firstly, we need understand the word ‘market’. What is a market? When we hear the word market, the first thing that comes to mind is a vegetable market, fruit market, or fish market, etc. If we look closely, we will find one thing common in all markets, the availability of buyers and sellers in one place conducting an endless number of the transaction on a daily basis.
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Now we have a basic understanding of a market, let us go much deeper, tell me one thing if you want to buy vegetables, where will you go? You go to the vegetable market. In the same way, if you want to buy shares of any listed company, you need to go to the share market. The share market is like any other market where an endless number of buyers and sellers are available and doing an endless number of transactions on a daily basis.
If we look at the vegetable market more closely, we can find various market participants like farmers, wholesalers, retailers, transport, and government. The stock market also has multiple participants like investors and traders, market intermediaries, regulators, stock exchanges, and companies.
Investor and trader are not necessarily two different people. One can be both an investor as well as a trader. Basically, investing and trading are a mindset. If anyone wants to deploy his capital for a longer term (more than one year), we call him an investor. On the other hand, if anyone wants to deploy his capital for less than one year, it may be 2-3 months or weeks, then we call him a trader.
Intermediaries are entities who are involved in every single transaction which take place in the market apart from buyers and sellers. These entities help in the smooth functioning of every transaction, which is executed on an exchange and ensures all rules and regulations are followed as per the regulators.
If an investor or trader buys shares of any company and wants to sell them in the next day or after a week, month, or year, in that case, he needs to park his shares somewhere. Here depositories come into the picture. These institutes provide a space to hold your shares, but you can’t open your account directly in these depositories. You need to find an agent who provides you with an account and the agent is known as a depository.
A trading member (stockbroker) is a stock exchange member who provides an account on the exchange to the investor. Since you cannot open your account on the stock exchange directly, you need to open a trading account with a trading member.
Clearing members are those entities that help to clear and settle all executed transactions on the exchange by the trading member.
A clearing corporation (clearing house) provide the financial guarantee for all the transactions executed on an exchange. Basically, they remove the counterparty risk. (Counterparty risk is a risk of defaulting any involved party.)
Clearing members must maintain sufficient funds with the clearing bank to honor all obligations. A clearing bank links the clearing member and the clearing house.
Regulators in the capital market plays a significant role in protecting the interest of investors in securities and promotes the development and regulates the securities market. In Australia, ASIC is the regulator of Australian market and financial services. The main role of ASIC is to ensure that the financial markets are fair and transparent. Some of the key roles of ASIC include:
ASIC regulates Australian companies, financial markets, financial service organisations and financial professionals. It also acts as consumer credit regulator and licenses.