Intermediaries in the Secondary Market. The secondary market is also known as the ‘after-market’. It refers to the financial market to buy and sell financial instruments and securities which have been previously issued. These financial instruments include stock, bonds, futures, and options. other names for such markets are Stock market or Stock Exchange.
Following are the prominent participants in the secondary market:
1. Stock Broker :
A stock broker is a professional with proper qualifications and regulatory knowledge. This professional deals in stocks and other securities on behalf of their clients. Brokers are also responsible for providing advisory services to their clients so that their funds are appropriately allocated. There are different types of stock brokers such as jobber, commission broker, odd lot dealer, security dealers, and taraniwalla, etc.
2. Financial Intermediaries :
Financial intermediaries are all those participants that intermediate and enable financial transactions. They assist the individual as well as corporate clients. Financial intermediaries can help in facilitating the movement of funds as they can accept funds from one organization and lend it to another. Thus, it acts as a mediator between net borrowers and the net savers of funds in an economy. These institutions borrow from the net savers and lend the funds to the net borrowers.
Following are the main financial intermediaries which facilitate the flow of funds:
a) Commercial Banks:
Commercial Banks are also known as joint stock banks as they have the same constitution such as joint stock companies. Commercial banks are the banks that carry out all the banking functions including accepting deposits, disbursing loans, granting credit facilities, and also performing agency functions.
b) Development Financial Institutions:
After independence, the country felt a strong need for the development of financial institutions. These institutions are required for supporting and accelerating the pace of industrialization. The existing firms needed funds for expansion, modernization and diversification while new firms had massive investment requirements. Development Financial Institutions were required to fill the gap between requirements and the existing banking system.
c) Insurance Companies:
Insurance may be defined as a social instrument for reducing or eliminating risk related to the loss of life or property. It implies a collective undertaking of risk. Insurance companies help in spreading the risks and losses of a few people among a large number of people. This is based on the assumption that people prefer to have a small fixed liability instead of a large and uncertain liability. It is economic cooperation for sharing unavoidable risks.
d) Mutual Fund:
A mutual fund is a form of collective investment which are managed by professionals. These professionals pool money from a large number of investors and invest them in various instruments such as stocks, bonds, money market instruments, and others.
Fund’s underlying securities are traded by the fund managed or the portfolio manager. The fund grows through capital gains or losses, interest income, and dividends.
2. Non-Banking Financial Institutions:
These institutions perform a variety of banking functions; however, as they do not hold a banking license, these are not called banks. Such non-banking financial institutions are the companies that are registered under the Companies Act, 1956 and are dirëcted by the Reserve Bank of India.
Such companies deal in loans, leases, housing finance, hire purchases, investments, etc. but exclude stock broking companies, stock exchanges, or insurance.
3. Individual Investors :
Individual investors generally do not engage in elaborate research for making investment decisions. They are simply required to communicate their réquirements to their brokers.
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