Types of Intermediaries

Intermediaries are the middlemen between any two parties that are partaking in a transaction. These middlemen act as the bridge between them and help in exchanging necessary information towards fulfilling the objective of a common goal.

In a stock market, or business, or any traditional marketplace, these intermediaries act as the connecting links between the producers and consumers. They facilitate intermediate action or transactions, between those parties.

To understand their functions in the marketplace and the role they play in providing a common platform to the players, one has to understand the types of Intermediaries. Depending on the type of intermediary, their functions are also predefined. You should also note that there can be intermediaries at various level of a supply or distribution chain. Hence, these levels could be a parameter to decide the roles of an intermediary.

Who are Intermediaries in a Stock Market?

An intermediary in a stock market is a person or an organisation which helps people to invest their money in various company stocks. A person involved in such intermediary activities is usually called a fund manager. 

Generally, among the types of Intermediaries in stock market, it can be one of the following -

  • Underwriter

As the name implies, underwriters are entities directly associated with a company or an organisation. Their primary function is to manage people and talk to them regarding investment in multiple schemes or so.

In India, for instance, an insurance company can be an underwriter. It charges a certain fee for providing you with insurance services under certain terms and conditions.

  • Merchant bankers

These are institutions that extend funds to a company in place of loans and share the ownership of that particular company. So, they gain a right to have a say in the corporate affairs of that organisation where they have invested.

Hence, merchant bankers become a link between large organisations and external markets. For instance, in India, State Bank of India, ICICI Bank, Punjab National Bank are some of the merchant bankers.

  • Portfolio Managers

It can be a person or a group of person or even an institution that manages money to be traded in the stock market. These intermediaries discuss the entire plan of investment with their team or with the organisation and then they trade in stocks or securities in the market.

Also, these types of Intermediaries invest in bonds, derivatives, mutual funds, etc to make more money out of their investments.

  • Debenture Trustees

These personnel are registered with the Securities and Exchange Board of India (or SEBI) and function based on the rules cited in SEBI Guidelines, 1993. These personnel are monitored by SEBI on their functions of creating security, complaints redressal, interest payments and debenture redemption.

They act as the connecting links between debenture holders and the organisation or company whose debentures have been purchased by those holders.

  • Sub Broker

A sub-broker is not directly linked to the stock exchanges but is a proxy member who has the necessary knowledge to act on behalf of the trading member. He can assist trading members and also investors in matters of securities dealing.

  • Stockbroker

Such brokers are part of the stock market as they assist in trading of securities. Although they charge a specific fee for facilitating such trading, their work is more effective than others. One of the most viable reasons behind such efficiency is their knowledge of the stock market. 

A trader lacks such knowledge and is likely to end up buying or selling securities at a higher price than it should be. In such conditions, an intermediator can help in linking the stock exchanges and traders rightfully.

What are the Types of Intermediaries?

Based on the functions and areas the intermediaries perform their tasks, they are divided into specific categories, that are listed below -

  1. Agents and Brokers

These are personnel who are directly associated with the organisation or stock exchanges. They function to link the buyer and sellers. Agents and brokers also handle the necessary paperwork.

  1. Distributors

They are appointed by the manufacturing company directly and act as a link between the wholesalers and the company itself. For instance, businessmen purchase from the company and distribute it to the wholesalers for further selling.

  1. Retailers

These are the connecting links between the consumers and wholesalers. Their job is to purchase goods from wholesalers and sell it to the end-customers.

  1. Resellers and Wholesalers

Wholesalers purchase from distributors and sell it to multiple retailers. They buy goods in bulk and sell them after that to other businesses or retailers. 

Among the types of intermediaries, agents and brokers are the first of their kind and people generally consider them as the only kind of intermediaries.

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FAQ (Frequently Asked Questions)

1. What is the Significance of Intermediaries?

Ans. The intermediaries enable the exchange of information and facilitate transactions between two parties effectively. They allow the exchange without any prominent loss in the process, which makes them an integral part of any system, where they are present.

2. What are the Types of Intermediaries?

Ans. Based on the meaning of Intermediaries, there are primarily four categories of intermediaries. These are brokers, wholesalers, retailers, and distributors.

3. What is the Primary Function of an Intermediary?

Ans. An intermediary is vested with the role of acting as a connecting link between two parties.