Financial Intermediaries in Stock Investing

Financial Intermediaries in Stock Investing

The middlemen between parties in a transaction, financial intermediaries are an entity such as an investment bank or a mutual fund. Find out the role they play.
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3 min read
Written by: Harry Atkins
November 30, 2019
Updated: February 24, 2021

Stock trading is an excellent avenue for investors to grow their income. Investors can buy and sell stock and capitalize on high performance by companies. In the process of stock trading, investors encounter many middle parties, including stockbrokers, investment banks, and dealers. This article discusses the role and significance of these intermediaries in stock trading.

I. What are financial intermediaries in stock trading?

The stock market provides a platform for stock trading. This market is quite huge and involves many individuals and institutions that exchange value on a daily basis. As such, there is a need for entities to facilitate the interactions among the market participants. Financial intermediaries, therefore, are the institutions or individuals that link up the numerous players in the stock market by way of facilitating financial transactions.

The financial intermediaries commonly found in the stock market include depository institutions/investment banks, stock exchanges (clearing corporations), and stockbrokers/dealers. The intermediaries ensure that resource relocation is efficient. Specifically, they ensure that entities with surplus capital get to channel it to those who need the capital for business operations. Let’s look at all the intermediaries and the roles they play.

II. Stockbroker/Dealer/Brokerage Firm

Usually stockbrokers act as agents of brokerage firms, but the term is also often used to refer to brokerage firms themselves. A brokerage firm, through the stockbroker, provides trading services to investors. These intermediaries obtain their authority from the license offered by a stock exchange. Investors open trading accounts with their desired stockbrokers through which they gain access to the stock market.

With a trading account, traders can buy and sell stock through intermediaries. Other roles that the stockbroker plays include facilitating transfer of funds between the trader’s bank account and the trading account, and providing market research to help traders in decision making.

III. Clearing corporations

These are affiliates of stock exchanges. Clearing corporations facilitate transactions within the stock market. These entities confirm, settle, and deliver transactions. As such, transactions happen promptly and efficiently. Given the bulk of transactions taking place at any given time in the stock market, these entities come in handy to ensure that transactions are smooth and that investors have confidence in the workings of the market.

IV. Depository institutions

Depository institutions are the banks and credit unions that issue demands as well as check deposits. Traditionally, commercial banks are the major entities that offer these services. On the other hand, credit unions and savings banks issue time/savings deposits as well as loans. There are no clear-cut demarcations on what commercial banks/investment banks can offer as opposed to credit unions and savings banks.

In the stock market, there is another type of depository institution that offers sanctuary to shares. These depository institutions offer accounts where investors store their shares electronically. This “Central Depository” ensures that shares are available for exchange once a trader initiates such a transaction. The account at the depository is linked with the trader’s trading account to ensure a fast and efficient settlement of transactions.

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