TOPIC 2: PARTICIPANTS IN THE FINANCIAL MARKET

Financial market refers to a market for the creation and exchange of financial assets (such as
shares and debentures). Financial market is a connecting link between the surplus and deficit
units, the financial market brings together the lenders and borrowers.

In this market, money from those who have surplus money is transferred to those who require
investment. Investors are surplus units and business enterprises are deficit units, where the
financial market acts as a link between surplus and deficit units.

The capital markets consists of a number of individuals and institutions. The Government is also
an important player in the capital market. The players in the capital market canalize the supply
and demand for the long term capital. The constituents of the capital markets are the stock
exchange, commercial banks, co-operative, banks, savings banks, development banks,
insurance companies, investment trusts and companies etc.

Primary Market
Primary market deals with the securities which are issued for the first time in the market and is
also known as new issues market.
The main participants in the primary market are Banks, financial institutions, insurance
companies, mutual funds and individuals
Secondary Market: Stock Exchange
The secondary market (also known as the stock exchange or stock market) is a market which
deals with the sale and purchase of existing securities. It is also called the stock market or stock
exchange. It provides opportunities of disinvestment and reinvestment to investors by
exchange of securities
A stock exchange is a platform for buying and selling securities this include equity, preference
shares and debentures. Participants of secondary market are Individual and corporate
investors, along with investment banks
Participants in the financial market
1. Banks:
Banks participate in the capital market and money market. Within the capital market, banks
take active part in bond markets. Banks may invest in equity and mutual funds as a part of their
fund management. Banks take active trading interest in the bond market and have certain
exposures to the equity market also. Banks also participate in the market as clearing houses.
2. Primary Dealers (PDs):
PDs deal in government securities both in primary and secondary markets. Their basic
responsibility is to provide two-way quotes and act as market makers for government securities
and strengthen the government securities market.
3. Financial Institutions (FIs):
FIs provide/lend long term funds for individuals, industry and agriculture. FIs raise their
resources through long-term bonds from financial system and borrowings from international
financial institutions.
4. Stock Exchanges:
A Stock exchange is duly approved by the Regulators to provide sale and purchase of securities
on behalf of investors through brokers. The stock exchange also known as a securities exchange
is a trading platform. It facilitates the registered stockbrokers and investors to transact in
securities electronically. The stock exchanges provide clearing house facilities for netting of pay-
ments and securities delivery. Such clearing houses guarantee all payments and deliveries.
Securities traded in stock exchanges include equities, debt, and derivatives.
5. Brokers/ dealers:
A broker-dealer may buy securities from their customer who is selling or sell from their own
inventory to its customer who is buying. Only brokers approved by Capital Market Regulator
can operate on stock exchange. Brokers perform the job of intermediating between buyers and
seller of securities. They help build up order book, price discovery, and are responsible for a
contract being honoured. For their services brokers earn a fee known as brokerage.
 6. Investment Bankers (Merchant Bankers):
These are agencies/organisations regulated and licensed by the Capital Markets Regulator.
They arrange raising of funds through equity and debt route and assist companies in completing
various formalities like filing of the prescribed document and other compliances with the
Regulator and Regulators.
They advise the issuing company on book building, pricing of issue, arranging registrars, bankers
to the issue and other support services. They can underwrite the issue and also function as
issue managers. They may also buy and sell on their account.
4. Investors and traders
You may know that trading and investing are two very different activities. But when you invest
in a publicly listed company in the stock exchange, you are regarded as an investor. On the
other hand, if you are looking to buy into a security for a short-term horizon with the intention
of profiting from price fluctuation in a stock, you are regarded as a trader.

In the stock market, traders and investors have different objectives, strategies and modes of
approaching financial markets. Within investors, there are two types. These include:
Retail investors – These are investors who invest in the stock market directly.
Institutional investors – These are typically financial institutions like banks, Asset Management
Companies (AMC), insurance companies, pension funds, etc. The investors could be domestic or
foreign. We now arrive at the fifth and final stock market participant — market intermediaries.

The role of government in the financial market

Minting money:
The government is the only agency which is authorized to create money supply in a country.
Therefore, it is the responsibility of the government to ensure that excess money is not printed
and flooded in the market. Financial systems tend to fail if there is excessive inflation in the
economy.
The role of central bank in the financial market
Regulating money in circulation:
They are the authority for issuing coins and notes, the money supply, and for regulating how
much money is in circulation. Central banks do this to inject liquidity into the economy so that
different economic agents (families, companies and States) can use it in their transactions.
The role of brokers in the financial market
Stockbrokers are individuals who buy and sell stocks and other securities for retail and
institutional clients, through a stock exchange or over the counter, in return for a fee or a
commission. Institutional stockbrokers work with fund managers and other financial
institutions.
The role of commercial banks in the financial market
Commercial bank: is a financial institution that provides services, such as accepting deposits,
giving business loans and auto loans, mortgage lending, and basic investment products like
savings accounts and certificates of deposit.