Trading & Settlement Process

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UNDERSTANDING THE TRADING AND SETTLEMENT PROCESS AND OTHER DOCUMENTORY REQUIREMENTS AT BROKERS’ OFFICE TO OPEN THE TRADING ACCOUNT

Understanding Trading and Settlement of Equities
Stock market is a trading platform which provides an opportunity to buyers and sellers of securities to do transactions. As of now there are 23 recognised stock exchanges in India and 24th is likely to get functional soon. However the majority of transactions in securities happen only on the National Stock Exchange. The Bombay stock Exchange is the second largest contributor in the overall pie of total transactions. However it's contribution is restricted to 5 to 7 percent only. There are three types of instruments that are traded on National Stock Exchange namely equities, derivatives and debt instruments. This article attempts to explain the procedure involved in trading and settlement of equities. Before understanding the procedure of trading and settlement, it is important to have an overview of changes that have taken place in Indian securities market in last ten years. Three most noticeable changes which have taken place are 1) Dematerialisation , 2) Introduction of screen based trading and 3) Shortening of trading and settlement cycles. The Depositories Act  was passed by the parliament in 1995 and this paved the way for conversion of physical securities into electronic. With establishment of National Stock Exchange, there was a significant change in the level of technology used for the operation of stock market. It led to introduction of Screen Based Trading thereby removing the earlier system of open outcry where prices of securities were quoted by symbols. Now all the transactions happen on computer which is spread across country and connected to National Stock Exchange through VSAT. These two factors combined together helped in reducing the trading and settlement cycle in Indian securities market which got reduced from as long as 22 days to 2 days currently. Presently in India, stock exchanges follow T+2 days settlement cycle. Under this system, trading happens on every business day, excluding Saturday, Sunday and exchange notified holidays. The trading schedule is between 10:00 a.m. in the morning to 3:30 p.m. in the evening. During this period , shares of the companies listed on a particular stock exchange can be bought and sold. The SEBI has made it mandatory that only brokers and sub-brokers registered with it can buy and sell shares in the stock exchange. A person desirous of buying or selling shares on the stock market needs to get himself registered with one of these brokers / sub-brokers. There is a provision for signing of broker/sub-broker - client agreement form. Brokers/sub brokers ask their clients to deposit money with them known as margin based on which brokers provide exposure to the clients in the stock market. However signing of client-broker agreement is not sufficient. It is also essential for a person to open a demat account through which securities are delivered and received. This demat account can be opened with a depository participant which again is a SEBI registered intermediary. Some of the leading depository in the country are Stock Holding Corporation of India Ltd., ICICI Bank, HDFC Bank etc. If an individual buys shares ,it is in the demat account that credit of shares are received.

Similarly when a person sells shares, he has to transfer shares to the brokers account through his demat account. All the brokers/sub-brokers also essentially have a demat account. Shares can be bought and sold through a broker on telephone. Brokers identify their clients by a unique code assigned to a client. After the transaction is done by a client broker issues him contract note which provides details of transaction. Apart from the purchase price of security, a client is also supposed to pay...
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