Stock Market Trading and Settlement Process
In stock market trading, when you purchase or sell stocks, you enter into a trade. However, this trade is settled when the buyer receives the shares, and the seller gets the money. The money is debited from the buyer's trading account while the share sale value is added to the trading account of the seller.
However, the trading settlement process is not that simple and involves different stakeholders and clearing authorities. As an investor, you do not have to get into the technical details of intraday trading and the consequent trading settlement process. There are professional intermediaries to complete the trading settlement process seamlessly. But it is crucial to understand the mechanics behind the stock market trading process.
Here is everything you should know about stock market trading and the trading settlement process:
What is Stock Market Trading, Clearing and Settlement?
Foremost, for intraday trading in the secondary market, you have to open a trading account online with a broker or sub-broker. Once your trading account is active, you can start your intraday trading. You can buy and sell securities as per your choice. Once your purchase or sale contract is completed, you receive a contract note specifying that the trade is settled.
Typically, there are three elements in the trading settlement process:
- Trading: When you place a buy or sale order through your trading account online, the stock exchange uses an electronic order matching system to match the stock orders from different traders. A trade match happens when a buy price is less than or equal to the best available sale price. The quantity of shares also affects the buy and sell the match. For instance, if there is a buy and sale price match, but there is not enough quantity to match the buy order, the order is not fulfilled fully. Only the available stock units at the asking price are included in the transaction. The trading orders are collected by brokerage firms from investors through their trading accounts. These orders are passed to stock exchanges for execution.
Also Read: How to trade with Zero Brokerage?
- Clearing: When a buy and sale price match, a trade is executed and results in a clearing. The clearing is the process whereby the security that is to be issued to the buyer is identified, and the due sum of the seller is ascertained. This clearing process is managed by independent bodies known as clearinghouses.
- Settlement: In the last step, the financial obligations as set out in the clearing process are fulfilled. The trade is settled when the former receives the securities and the latter receives the payment. The official deal is done on the transaction date (T), but the settlement date is when the security ownership and money are transferred, generally T+2.
What are the Different Types of Trading Settlement Processes?
About intraday trading meaning, there are two types of stock market trading settlement processes:
- Spot settlement: This means the trading settlement process is done immediately according to the rolling settlement principle of T+2. As per the Rolling settlement principle, intraday trading settlement happens within T+2 days. The trade is closed after the second working day. Non-working days include Saturdays, Sundays, bank or national holidays and exchange holidays. For instance, if you buy some shares on a Friday, you will pay the transaction cost to the broker, but these shares will reflect in your trading account online on Tuesday. Your ownership for shares will begin from the day of trade settlement.
- Forward settlement: In this type of trading settlement process, the buyer or seller agree to settle the trade at a later date in the future, which could be T+5 or T+7.
Important Aspects to Know About the Trading Settlement Process
- All stock trading online is settled within T+2 days in the Bombay Stock Exchange (BSE)
- The stock market trading settlement process is the same for equity, bonds, government securities and other fixed-income securities.
- The payment to the broker (intermediary) is made on the same day of the trade.
- The rolling equity trading settlement process for NSE (National Stock Exchange) is slightly different from BSE.
Overall, the trading settlement process is a complex process that involves various participants, including clearing corporations, clearing members, custodians, clearing banks, depositories, and professional clearing members. Understanding the stock market trading concept can help you better plan your intraday trading activities.
Also Read: What is an Indian Depository Receipt?
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Frequently Asked Questions
The day you sell your stock is a trading day (T), and the same day your trading account online blocks the concerning stocks. These stocks are handed to the exchange before T+2 days. On T+2 day, the money from the sale of stocks is credited to your trading account online after deduction of applicable charges.
The trading settlement process takes T+2 (transaction day + 2 days more) to settle. Hence, if you bought shares on Tuesday, wait until two working days (Thursday) for the shares to reflect in your stock trading online account.