The Indian share market is one of the most vibrant and growing globally. An Indian share market provides a superlative platform to both regional and global investors to be part of the growth in that country. However, before investing or trading in the market, one should first know about the important players or participants driving activities going in the market. The Indian equity market is a highly complex system having various stakeholders engaged in ensuring it works flawlessly and remains liquid.
In this blog post, we are going to go through various market participants that form an Indian share market, what they do, and how they add up towards general functionality of this system.
1. Retail Investors
This refers to an individual trader in the stock market who uses personal funds to trade in the stocks. The retail investor is considered the backbone of the market since most of the liquidity is credited to their supplies and they also dictate the mood and sentiment of the market. Most retail investors now trade through the services of a broker or through direct access by electronic trading platforms.
It is argued that retail participation in India’s stock market has been steadily growing. In this regard, some immediate parameters that come to mind are acquiring financial literacy, rapid growth in digital trading platforms, and even a trend of investment in mutual funds and stocks. For example, the regulatory authority SEBI has made varied initiatives for the protection of retail investors-increasing transparency in the market with fair practices.
This is held mainly for the long-run generation of wealth, and there is also an important component that operates with short-term trading and speculation. These tend to act mainly as price takers; they accept the going market price rather than determining it.
2. Institutional Investors
Institutional investors are among the large buyers in the market, and actually invest enormous sums of money. Under this category would fall large money from mutual funds, pension funds, insurance companies, banks, and foreign institutional investors, or FIIs. Institutional investors will be a defining market trend simply due to the enormous volumes of money that they command.
Mutual Funds:
Mutual funds pool money from individual investors, thereby forming a diversified portfolio of stocks, bonds, and other securities. A mutual fund is invested based on a decision taken by a professional fund manager.
Insurance Companies:
An insurance company invests premiums collected from the policyholders in the stock market with an intention of generating returns for policyholders while, at the same time, ensuring there will be enough liquidity to meet their claims in future.
Foreign Institutional Investors (FIIs):
FIIs comprise foreign investors invested in the Indian equity markets. They bring much-needed experience and skill to market operations and, therefore enhance the efficiency and liquidity of the market. They bring in foreign capital to the market. In large-cap stocks, FIIs play a very influential role, and investments made by FIIs dictate the market sentiment most of the times.
Since institutional investors have huge capacities and capabilities in making wise investment decisions, institutional investors can be considered “smart money” in the market, affecting mostly short-term stock prices.
3. Stockbrokers
Thus, stockbrokers act as middlemen between the stock exchange and retail investors. A stockbroker may buy shares on behalf of the customer or sell shares on behalf of the customer for a commission or brokerage fee. Here in India, under SEBI, it can be an individual or a firm.
Stockbrokers have a job that is highly essential for making sure all the trades carry on very smoothly. They help at the advisory, research, and even margin trading level. With the emergence of online trading platforms, many retail investors are now reaching stockbrokers through digital apps. That has really eased up the process for them while providing them with instant real-time market information directly.
Stock brokers may be classified into two categories in India
Full-service brokers:
Full-service brokers offer a large number of services, such as personal research, investment advice, and management of the portfolio.
Discount brokers:
Discount brokers usually sell trading services at a much lower cost and do not offer advisory services and rely on technology for order execution.
4. Stock Exchanges
Stock exchange can simply be described as a place of buying and selling of securities. In India, two major stock exchanges prevail: Bombay Stock Exchange (BSE) and the **National Stock Exchange (NSE)– where shares, derivatives, bonds, and so on are traded.
Stock exchanges play an extremely central role in the smooth functioning of the market. They provide the infrastructure, rules, and regulations that allow for transactional fair conditions in regard to transparent trading. Apart from providing the infrastructure, they also provide a mechanism for price discovery-that is, the process by which the prices of stocks are determined through the dynamics of supply and demand.
5. Regulators: SEBI and RBI
The main body of regulation for the working of Indian security markets is the Securities and Exchange Board of India. Its regulations provide a level-playing field to all the market players and make the market ethical and fair, safeguarding the interests of investors.
The basic functions of SEBI are as follows:
Protections in regard to the interest of investors
Different middlemen working in the market- Security Broking, Mutual Funds, Portfolio Managers etc.
The artificiality of the market through insider trading would be protected.
Apart from SEBI, another very important body of the Indian financial markets- more so in monetary policy and currency-is the **Reserve Bank of India (RBI)**. RBI controls inflows and outflows of cash into and out of the country; this affects the volume of foreign investment and liquidity in the market.
6. Market Makers
Then, a market maker is an entity or individual that guarantees liquidity in the market by providing a quotation for selling and buying a particular stock or security. It can thus provide supply as well as demand for stocks, thus enabling the smooth executions of trades.
They reduce the volatility of the equities’ stock price because they provide a liquid market for equities at any time, even when the activity is less. Income is realized through the bid-ask spread, or the difference between buying low and selling high. A few equities in India have appointed both BSE and NSE market makers .
7. Clearing and Settlement Agencies
Thus, the clearing and settlement agencies, such as NSDL– or National Securities Depository Limited and CDSL– or Central Depository Services (India) Ltd, ensure a hassle-free process in the sense that transactions made within the stock exchanges are settled. After a trade is struck, the clearing and settlement agency acts as a liaison between the seller’s account and the buyer’s account for the transfer of securities.
In doing so, they ensure that the process is effective, secure, and free from any prospective disputes.
The Indian Share Market
The Indian share market is a web of well-governed players from the retail, the institution ones, the stockbrokers, the stock exchanges, regulators, market makers, and clearing and settlement agencies creating a vibrant market wherein capital is correctly sorted, which can possibly reflect investment opportunities for everybody.
This would hence call for an understanding of such market participants with their respective roles so that informed investor decisions are made and, at the same time, remain transparent, efficient, and accessible to all kinds of participants. Whether it is to invest or just to understand better, knowing the key players in the Indian share market is the first step toward realizing your financial goals.