Trading in the stock market is similar to any other business that requires investors to buy the product at a cheaper rate and then sells at an expensive rate. Trading means, buying low and selling high. The same is the case with stock market trading, traders buy stocks at a lower price and sell when they reach their targets.
Also, you should know that stock market trading is the only form of trading where you can set a stop loss as per your target. The Indian stock market follows a mechanism for the same process. For us as an investor, buying and selling both processes looks easy, but it is not. The process involves a lot of parties.
The number of parties in the stock market ensures smooth functioning and keeps a check on the transaction. In this write-up, we will take a look at how the trading settlements cycle in the Indian stock exchange work.
The trading cycle includes:
- Trading
- Clearing
- Settlement
Trading
The execution process includes the order placed for buying and selling. When you place the buy order for any security the order gets deposited into the demat account. And, when the sell order is placed, the shares are debited from the demat account and the proceeds are transferred to the demat account. This entire process is called trading. And, margin trading is when the trader borrows money from the broker to buy or sell financial securities in the market.
The trading process is said to be completed when the execution takes place. Post which, the order goes for clearing to the clearinghouse. As discussed in the next point.
Clearing
As we know, majorly, there are two parties involved in the transaction: the buyer and the seller. To ensure a smooth transaction between both parties, there is a middleman involved. The clearinghouse makes sure, the bid price of the buyer and the asking price of the seller are matched.
Also, to avoid any miscalculation and discrepancy the money is collected by the clearing and then transferred to respective accounts. This ensures smooth and risk-free transactions.
Settlement
Settlement is said to have occurred when the money has been exchanged from one account to the other. The settlement process takes T+2 days in the Indian stock market. However, in the case of intraday trading, the settlement is done within one trading session only.
There are two types of equity settlement that are followed in the Indian stock exchange:
- Spot Settlement:
The settlement is carried out immediately and at the spot rate. In this case, the financial securities are transferred within T+2 days.
- Forward Settlement:
This type of settlement takes time. The settlement is carried on a future date, the transfer can be within T+5 or T+7 days as mentioned in the contract.
Participants in the process involved
- Clearing corporation
It is the most important participant in the entire trading procedure. For trading in India, the clearing corporations handle and keep a check on the entire transaction process.
- Clearing Member
The clearing member is a part of the clearing corporation. When the deal is passed on to the clearing corporation the clearing member settles that deal.
Also, in the capital market all the members of the exchange work as clearing members.
- Clearing Bank
When the funds are transferred from the buyer's account to the seller's account, the clearing bank handles that transaction. The clearing member must open an account in the clearinghouse. In the case of pay-out, the clearing member accepts the money in an account with the clearing bank.
- Depositories
Two depositories have been appointed: National Securities Depository Limited (NSDL) and Central Depository Limited Services (CDSL). The two bodies hold demat and trading accounts. And, also maintains smooth transactions between the buyer and the seller.
Depository participants are then appointed by the depositories to open demat and trading accounts.
These are the participants that take part in the trading process and ensure a smooth trading process.
Process Of Trade Settlement
- When an investor places a buy order, the order is transferred to the exchange. The exchange then informs the clearing corporation regarding the order.
- The clearing corporation closes the trade after asking the clearing member. If the clearing has any obligation, the process is halted for that moment.
- Once the details are confirmed from the clearing member, the order goes to the clearing bank, and funds are then released.
- Post clearing of the funds, the depositories get the securities in their account. Which are then transferred to the investor’s demat account.
Also, remember that on the sell the opposite of it happens. The depository is credited with funds and the clearing member gets the security.
The process of trading takes place, is completed instantly, and takes only a fraction of a second. The securities demat account transfer from one account to the other takes place in the background.
Also read:- How Does Demat Account Work For Trading?
