To understand the trading and settlement process and why you should know about it, you must have a Demat account. The purpose of a Demat account is multi-dimensional, and you can open one with a bank or a broker. You can begin trading once you have an active account. In a secondary market, the settlement process starts with selecting a broker and is complete with the settlement of shares. On settlement of your trade, you receive a contract note from the broker.
What is trade settlement?
Trade settlement is a two-way stream in the final stage of any transaction. Once the seller receives the payment for the sold securities and the buyer receives the securities, the trade is assumed to be settled. Here is a crux that you need to understand: a transaction date, meaning the day you took the trade, and a settlement date, meaning the day you received absolute ownership. The settlement day is seldom the same day.
As per SEBI, in India earlier, the settlement day was T+2, meaning you were entitled to absolute ownership two days after taking the trade. However, this has recently been changed and brought down to T+1.
Earlier, when online demat accounts were not a thing, it took five days to settle trades after the transactions. The delay resulted in price differences, incurred higher costs, and other associated risks. Despite innumerable trials by the market regulators to bring down the time frame, it failed due to the excess paperwork required.
Types of settlements in the stock market:
You will come across two types of trade settlements in the stock market:
- Spot settlement is when the trade settlement is done immediately by applying the T+1 rolling settlement principle.
- Forward settlement is when you agree to a trade settlement at a future date which can be T+5 or T+7
What is Rolling Settlement?
Rolling settlement refers to the days after the trade in which the settlement occurs. From January 27th 2023, the trades settle in T+1 days, meaning the deals close within one working day. Working days, excluding weekends, bank holidays, and exchange holidays, mean all other days.
For instance, if you take a trade on Monday, February 13th, that will be recorded as your transaction date. However, the trade will be settled on February 14th, your settlement date. But, if you buy shares on Friday, the shares will be credited to your account on Monday. However, you will have to pay the broker on Friday itself.
Why did the settlement day change from T+2 to T+1?
On January 27, all the brokers and banks providing a demat account moved to a T
+1 settlement cycle. The regulators have initiated the move to enhance market liquidity. The change applies to all types of transactions on NSE and BSE. A shorter settlement cycle means quicker completion of trades and quicker access to funds, as users can withdraw funds a day earlier.
Each day, the 24-hour trading volume of both stock exchanges is considerably high. It is essential to follow the designed protocols for all the trades to be conducted smoothly. The purpose of a demat account is to be user-friendly and carry on trades without violations. Having a demat account with a reputed broker like Klevertrade can be a boon for your trading journey.