The ChoosaBroker Trading Academy

6.4. Regulatory Framework

Although it hasn’t always been the case, the securities industry in most developed and emerging economies is today subject to stringent regulations. It is important that you as an investor are aware of the rules that govern stock markets. Knowledge about these rules will make you conscious of the rights you enjoy.


The regulation of equity markets encompasses the regulation of public issuers of securities, secondary markets, market intermediaries, and asset management companies.

Regulation is designed to eliminate asymmetries of information between issuers of securities and investors, and between clients and financial intermediaries, which, in turn, is essential to ensure the smooth conduct of market operations.

The stock market is a major financial entity with players big and small. The market provides a platform for companies to raise capital, and enables the general public to participate in the growth of these companies. Federal governments through specialized bodies regulate much of the stock market’s activity. The objectives of regulation are threefold –

  1. Market Confidence – Maintaining confidence in the fairness of the system
  2. Financial Stability –Protecting and enhancing the stability of the stock market
  3. Consumer Protection – Ensuring appropriate protection for consumers
Most federal securities regulators have put in place systems and structures to monitor market activity and enforce actions. Let us discuss a few of them below:


The stock market’s primary activity is to provide a mechanism for the transformation of consumer savings in to finance for the real sector of the economy. This is facilitated by providing a platform to encourage public ownership of business corporations.

If a company plans to “go public,” it can potentially gain access to large sums of capital from the investing public. To ensure that the investing community can make informed choices about whether or not to subscribe to a new issue, regulators mandate that companies provide full, timely and accurate information about not just their financial health but also the nature and extent of their operations.

Mechanisms are also put in place to ensure that the information provided by such issuers is reliable, failing which, the management is held accountable and is liable for punitive action. Furthermore, disclosure obligations are imposed on issuers not just at the time of authorization for public offering, but on a continual basis. Once the company gets listed on a stock exchange, it must regularly file financial statements that provide a comprehensive look at its earnings, revenue, debt structure, salaries of its principal officers and other vital information. Shareholders need these financial statements to evaluate the performance of their equity investments.


The regulation of secondary markets seeks to establish practices that secure not just the business of trading, but also the clearing, settlement and depository processes. The efficiency and credibility of the market operating mechanism is ensured by providing fair access and adequate price information to participating investors.

Stock exchanges are subject to strict licensing requirements, including standards applicable to trading technology and risk management systems. They are also subject to ongoing scrutiny, including inspections and reporting requirements.

Secondary market regulation aims to limit the disruptive impact that the failure of any market intermediary to comply with the rules can have on effective price discovery. Rules are also put in place to eradicate market abuses like trading on the basis of insider information, market manipulation, and misrepresentation of facts.


Brokers act as intermediaries between an investor and the stock exchange. Without a broker, investors won’t be able to buy and sell shares. The regulation of market intermediaries has three core objectives:

  1. To protect assets of clients from insolvency of the brokerage firm.
  2. To guard against defaults and sudden market disruption due to settlement failure.
  3. To ensure that intermediaries remain transparent in their dealings with the clients.

The main tools to regulate market intermediaries are licensing requirements and business conduct obligations. To operate as a broker, an individual or an entity has to first get registered with the securities regulator. Once registered, the regulator then enforces rules that all brokers must abide by. Among other responsibilities, the brokers are required to regularly inform the regulator about:

  • Net capital position so that liabilities not secured by their own assets remain covered at all times
  • How they lend money to their clients and use customers’ securities and funds
  • How IPOs are pushed in to the public market
  • Any changes in their capital or organizational structure.
  • Choosabroker only reviews the top brokers that are regulated by the relevant financial authority


The regulation of asset managers aims to safeguard investors’ rights by professional management to make adequate disclosures of their investments. The regulatory mandating focus is primarily on collective investment schemes. Since these units of collective schemes are investment instruments in their own right, they are bound by the same principle of full, timely, and accurate disclosure that applies to securities issuers. In addition, the operators and managers of the collective investment schemes act as financial intermediaries, and the rules governing other intermediaries are also applicable to them.


The role of securities markets is much more meaningful in developed economies. However, there is growing evidence to suggest that securities markets in emerging economies are also beginning to gain a place as an important source of financing for the corporate sector.

Stock markets are critical to economic growth and financial stability. Markets provide the best mechanism for asset pricing, and enable constituents of the economy to transfer and diversify risk. The more efficient stock markets are the better will be these key outcomes.

Looking for a broker? Find the best online brokers or these great crypto brokers!