Constituents of the Financial Market

A financial market is not a single institution — it is made up of several distinct groups of participants, each playing a different role, working together to move funds from savers to borrowers.

• Regulators — bodies set up by law to oversee the fair and orderly functioning of the market and to protect the interests of participants, particularly investors. In India, the Reserve Bank of India (RBI) regulates the banking system and the money market, while the Securities and Exchange Board of India (SEBI), established under the SEBI Act, 1992, regulates the capital market — registering and supervising intermediaries, framing rules for stock exchanges and listed companies, and taking action against unfair practices.
• Intermediaries — institutions and professionals who stand between savers and borrowers and make the transfer of funds possible and efficient, without themselves being the ultimate source or the ultimate user of the funds. These include:
  • Commercial banks — accept deposits from savers and lend to borrowers, and also participate actively in the money market.
  • Stock brokers and sub-brokers — execute the buy/sell orders of investors on a stock exchange.
  • Merchant bankers — assist companies in raising funds from the primary market, including managing public issues.
  • Underwriters — undertake to subscribe to any part of a public issue that is not fully subscribed by the public, for a fee, thereby guaranteeing the issuer a minimum amount of funds.
  • Depositories and depository participants — hold investors' securities in electronic (dematerialised) form and facilitate their transfer.
  • Credit rating agencies — assess and publish the creditworthiness of debt-issuing companies/instruments, helping investors judge the risk involved.
  • Mutual funds — pool the savings of a large number of small investors and invest the pooled corpus in a diversified portfolio of securities, managed by professional fund managers.
• Savers/Investors (the fund-surplus units) — households, corporate bodies, and institutions (such as insurance companies and pension funds) that have funds in excess of their immediate needs and are willing to invest them in financial assets in exchange for an expected return. …