The trading and settlement process in a secondary market begins with the selection of a broker or sub-broker and ends with settlement of shares. For secondary-market trading, you need first to open a dematerialised (DEMAT) account with a broking house or bank. Once your account is active, you can buy or sell securities. Once your order is executed, and you get a contract note, that’s when your trade is settled

What is trade settlement?

Trade settlement is a two-way process which comes in the final stage of the transaction. Once the buyer receives the securities and the seller gets the payment for the same, the trade is said to be settled. While the official deal happens on the transaction date, the settlement date is when the final ownership is transferred. The transaction date never changes and is represented with the letter ‘T’. The final settlement does not necessarily occur on the same day. The settlement day is generally T+2.

Earlier, when securities were held in physical format, it took five days to settle a trade after the actual transaction. Investors made payment in cheques after receiving the securities which came in the form of certificates and were delivered by post. The delay caused differences in prices, posed risks and incurred a high cost. To control transaction delay, market regulators decided to set a date within which the transaction had to be completed. Due to paperwork, earlier the settlement date used to be T+5, which has now been reduced to T+2 post computerisation.

Types of settlements in the stock market:

Trade settlements in the stock market have been broadly categorised into two:

1. Spot settlement – This is when the settlement is done immediately following the rolling settlement principle of T+2.

2. Forward settlement – This happens when you agree to settle the trade at a future date which could be T+5 or T+7.

What is rolling settlement?

A rolling settlement is one in which the settlement is made in the successive days of the trade.  In a rolling settlement, trades are settled in T+2 days, which means deals are settled by the second working day. This excludes Saturday and Sunday, bank holidays and exchange holidays. So, if a trade is conducted on a Wednesday, it will be settled by Friday. Similarly, if you buy a stock on Friday, the broker immediately deducts the total cost of investment from your account the same day, but you receive the shares on Tuesday. The settlement day is also the day you become the shareholder of record.

The settlement day is essential for those investors who are looking to earn dividends. If the buyer wishes to receive a dividend from the company, then he must settle the trade before the record date for a profit.

Rolling settlement rules in BSE:

1. In the Bombay Stock Exchange (BSE), securities in the equity segment are all settled in T+2 days.

2. Government securities and fixed income securities for retail investors are also settled in T+2 days.

3. Pay-in and pay-out of monies and securities need to be completed on the same day.

4. The delivery of securities and payment by the client has to be done within one working day after the BSE completes the pay-out of the funds and securities.

Settlement cycle on the NSE:

The cycle for rolling settlements on the National Stock Exchange (NSE) is given below:

Activity Working days
Rolling settlement trading T
Clearing including custodial confirmation and delivery generation T+1
Settlement through securities and funds pay-in and pay-out T+2
Post settlement auction T+2
Auction settlement 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

What is pay-in and pay-out:

Pay-in is the day when the buyer sends the funds to the stock exchange, and the seller sends the securities. Pay-out is the day when the stock exchange delivers the funds to the seller, and the shares purchased to the buyer.

What is a bad delivery?

A bad delivery is when shares transfer is not completed because of the lack of compliance with the norms of the exchange.

Conclusion:

A considerable volume is traded in the stock exchange regularly. For each trade to be conducted smoothly, these processes are followed. For an investor to make informed decisions, it is essential to know these before trading.