Clearing and Settlement Process In The Stock Market
In the
stock market, either you buy or sell stock from your demat account. When you
purchase a stock, the amount is debited from your bank account and shares are
credited to your demat account. Similarly, when you sell shares, the shares are
debited from your demat account and money is credited into the bank. This
process seems simple but it is not as easy as it looks. To ensure that the
whole process is completed smoothly and without any fraud, the regulators have
devised a trading cycle along with a clearing and settlement process.
Clearing and Settlement Process When You
Purchase a Stock
The
basic requirement for purchasing a stock is having a demat account for holding
it electronically and having a bank account for financial transactions. So when
you purchase a stock the following activities take place.
· Day 1
The
day on which you purchase a stock is called Trade Day or T Day. On this day the
broker gives you the contract note of the transaction along with the charges.
The contract note is like a bill for the purchase of stock. The money is
debited from your bank account and the shares are not yet credited to your
demat account.
· Day 2
It is
the second day after your purchase. It is also known as Trade Day + 1 or T + 1
Day. On this day, the stock exchange collects the amount for shares purchased
along with the charges from your broker.
Shares
purchased by you are not yet credited to your demat account. However, you can
sell the stock purchased yesterday as Buy Today Sell Tomorrow or BTST trade.
Before doing so, you must know the risk attached to the BTST trade.
· Day 3
This
is the second day of your purchase. It is also known as Trade Day + 2 or T + 2
Day. On this day the shares are debited from the demat account of the seller
and credited to the broker’s account. The broker then credits those shares into
your demat account. The money that was debited from your bank account for the
purchase of shares gets credited to the bank account of the seller.
Clearing and Settlement Process When You
Sell a Stock
The
share selling process is similar to the share purchase process. It is as
follows;
· The shares are sold on Day 1 or T Day. The
shares sold by you get blocked in your account so that you cannot resale them
again.
· On the second day or T+1 Day, your broker will
give the shares to the stock exchange.
· On the third day or T+2 Day, money would be
credited to your bank account after deduction of all the charges.
Participants Involved in Clearing and
Settlement Process
· Depository
A
demat account holds your shares electronically. This facility of holding your
shares electronically is provided by the depository. It is responsible for
maintaining the ownership records and facilitating trading in electronic or
dematerialised form.
· Clearing
Corporation
A clearing
corporation plays the role of transferring every trade to the custodian or the
clearing member. It ensures that the settlement cycle is risk-free and short.
· Clearing
Members and Custodians
All
the trades are transferred by clearing corporation passes to a clearing member
or custodian. They have the responsibility of transferring shares and funds on
T+2 days to the respective holder's account.
·Clearing
Banks
SEBI
has made a list of 13 banks that will help in the movement of money. Every
clearing member needs to open a bank account with one of the listed banks. The
clearing banks have the responsibility of smooth movement of funds between the
buyer and seller of shares.
Hope
this article helped you in learning something new about the stock market. If
you are looking to open a demat account, you may consider Indira Securities. We
are one of the fastest growing broking firms in India. We offer a wide range of
financial services and that too at affordable rates.
People also ask
What is clearing and settlement process?
How is settlement done in stock market?
What is clearing and settlement in NSE?
What is clearing and settlement in trade life cycle?
What is trading and settlement procedure in stock exchange?