Home » What is trading and settlement on stock exchanges?

What is trading and settlement on stock exchanges?

What is trading and settlement on stock exchanges?

Photo courtesy Geralt on Pixabay.

There is a trading and settlement process in the stock markets. Anyone wanting to trade or invest in the markets has to open a Demat account with a broker or a bank. The broker may be a discount broker or a full-service broker. Once the account becomes active a person can buy and sell securities.

You may decide to buy or sell a stock and there are two dates to take note of; one is the transaction date and the other is the settlement date. The transaction date is ‘T’ and the settlement date is represented by T+1. The settlement here happens on the transaction date plus one day; which was till the recent transaction date plus two days. The settlement date is the time period in which the ownership of the stock is transferred.

Security transactions in the past were done manually and the investors would wait for the physical delivery of the share certificates. It was not in the electronic form we see now. The delivery time could vary and the regulators set a time period in which the securities and the cash could be transacted. The settlement of stocks about two decades back was in T+5 days which are 5 days after the transaction day. Now the settlement is in T+1 days.

The process for getting the stock or the money-

Let us suppose you buy a stock with a T+1 settlement on Tuesday and there is no holiday in between, then the settlement date would be on Wednesday. Saturday, Sunday, bank holidays, and exchange holidays are not included in this time frame. In the same way, if you buy a stock on Friday you must pay the broker the same day and the stock will be deposited into your account on Monday. You become a shareholder of the company on record the day the trade is settled.

Different stocks have different settlement periods. It is good to know the settlement date for investors who are interested to collect dividends from a company because the trade must be settled before the record date for dividends.

So as we have discussed above there are three phases in a secondary market transaction-

1. Trading-

Millions of people trade every day in the stock market and a large number of trades occur simultaneously. There is an electronic order matching system to match the buy and the sell orders for different traders. The costliest buy prices are matched against the cheapest sell prices and whenever the buy price is less than or equal to the selling price a match is done. These depend on the quantities available in the market for the buy and sell orders. This is the ‘T’ day.

2. Clearing-

Once the trade is executed and the orders match the clearing process comes into effect. In this, there is the identification of what security is owned by the buyer and how much money is owed to the seller. The process is carried out by the security houses. This is done on the T+1 working day.

3. Settlement-

The next step is the fulfillment of the financial obligations. Once the buyer receives the stocks and the seller receives the payment the transaction is considered settled. This is the T+1 working day.

There are various participants involved in the whole process the National Securities Clearing Corporation Limited (NSCCL), the custodians, clearing banks, the two depositories- NSDL and CDSL and the professional clearing members.

Leave a Reply

Your email address will not be published. Required fields are marked *