As an investor, you might think that buying or selling stocks in the Indian stock trading market completes the transaction. However, the back-end process is huge and what goes behind the scenes to make the trading smooth and successful is something that only a few are aware of. For instance, the stock trade in India is just the surface of the entire secondary market transaction. And the back-end processes include the clearing and the settlement process as well.
Published on 06 February 2023
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In the case of secondary Indian stock market trading, one needs to open a Demat account first. And once the account has become active, you will be able to buy and sell securities. Also, after your order has been completed, you will receive a contract note which means that the trade has been settled. The settlement processes in the secondary market commence with selecting a stockbroker and end when the shares are settled.
What is Trade Settlement?
The settlement process in trade is a two-way process. This comes during the last phase of the trading transaction. The process is simple; the buyer gets the stocks, the seller receives the money for the stocks, and the settlement of the trade is done.
The deal officially takes place on the date of the transaction, and the date of settlement refers to the day when the transfer of the final ownership of the securities takes place. The date of the transaction is represented by the letter ‘T’, and it remains constant. The ultimate settlement process in stock market doesn’t take place on the day of the transaction. Hence, the day of settlement is termed as T+2.
Previously, when the stock exchange sold the securities in physical form, it took almost 5 days to settle a trade post a transaction. Investors had to make payments through cheques once they received the securities that came in the form of certificates delivered to them by post. This delay caused price differences and posed higher risks, thereby incurring a higher cost.
So, to control the transaction delay, stock market regulators finalised a date within which the trading transaction needed to be finished. Due to lengthy paperwork, the settlement date earlier used to be T+5. Now, it has been lessened to T+2 post digitalisation of the processes. Also Read: Open Paperless Demat Account
Types of Settlement Processes in the Stock Market Trading
There are two kinds of settlement process in the stock market in India:
Spot Settlement: This is the step in which the settlement process in stock market is carried out immediately through the rolling settlement principle of T+2.
The rolling settlement is a process where the settlement happens in the consecutive days of the trade. During this process, the trading is settled in T+2 days. Hence, the deals are settled on the very next day of the transaction. However, it excludes the bank holidays, Saturdays and Sundays, and exchange holidays.
For instance, if a stock trade in India takes place on a Tuesday, the settlement happens by Thursday. Similarly, if you buy stocks on a Thursday, the total value of the investment will be deducted from your account the same day by the stockbroker; however, you will get the shares on Monday. The day of settlement is when you finally become a shareholder of the stocks you have bought.
Rules for Rolling Settlement
There are a few rules for the rolling settlement process as prescribed by the BSE and the NSE. Let us have a look:
Settlement Process Cycle in BSE (Bombay Stock Exchange)
Activities
Total Working Days
Securities Trading along with the daily statement downloads with details of transactions and margins. Final obligation downloads.
T
Pay-in and Pay-out of securities
T+1
Final obligation for Return Legs
T+2
Pay-in and Pay-out of securities, Buy-in auction for the failure of returning securities
T+2
Pay-in and Pay-out of securities for auction settlement
T+3
Settlement Process Cycle in NSE (National Stock Exchange)
Activities
Total Working Days
Rolling Settlement
T
Clearing, Including Custodial Confirmation and Delivery Generation
T+1
Settlement Order Through Securities and Funds Pay-In and Pay-Out
T+2
Post Settlement Auction Process
T+2
Auction Settlement Process
T+3
Reporting For Bad Deliveries
T+4
Pay-In-Pay-Out of Rectified Bad Deliveries
T+6
Re-Reporting of Bad Deliveries
T+8
Closing Of Re-Bad Deliveries
T+9
Conclusion
The stock trade in India follows different processes to trade stocks successfully regularly. But, all the processes mentioned above are followed for trading to happen smoothly. So, for you, as an investor, to make informed trading decisions, it is essential to know about these.
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The stock market is volatile, especially if you are involved in intraday trading. However, it is the volatility of the stock market that makes it so lucrative for investors. Sudden peaks can result in significant profits, provided you follow intelligent and effective intraday trading strategies.
Intraday trading involves more risk compared to the regular stock market. Thus, if you want to avoid making losses, you must understand the basics of the concept. Traders must only invest the amount they are comfortable in losing to avoid financial disasters.
Also known as day trading, intraday trading refers to the purchase and sale of stocks and other financial instruments within the same day. There's no change in the ownership of shares due to these trades once all the positions are squared-off before the market shuts.
The stock market is volatile, especially if you are involved in intraday trading. However, it is the volatility of the stock market that makes it so lucrative for investors. Sudden peaks can result in significant profits, provided you follow intelligent and effective intraday trading strategies.
Intraday trading involves more risk compared to the regular stock market. Thus, if you want to avoid making losses, you must understand the basics of the concept. Traders must only invest the amount they are comfortable in losing to avoid financial disasters.
Also known as day trading, intraday trading refers to the purchase and sale of stocks and other financial instruments within the same day. There's no change in the ownership of shares due to these trades once all the positions are squared-off before the market shuts.
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