Transaction phases in Stock Market

There are 3 distinct phases in the secondary market. They are as follows.

  1. Trading
  2. Clearing
  3. Settlement

Stock exchanges in India feature an electronic order that facilitates efficient and speedy execution of the trade. The electronic order is nothing but a matching system that matches buy and sell orders.

All stock exchanges in India follow a common settlement system trade takes place on a particular day (called T) and are settled after 2 business days after the trading day (T + 2).

If I am a buyer then I will get the shares in my demat account after 2 days and if I am a seller then I will get the money in my account after 2 days.

T+2 where,

T = Trade Day

2 = number of working days.

Trade Day:- The day on which the trade takes place either buying or selling is called as trade day.

T+2 Settlement:- It is a system in which the transaction is settled after 2 working days from the trade day.

Let’s go into a little bit of technicality though it is not necessary to bother about this because a team is there to do it for you but you should know the process and how it works.

Clearing House:-

Let’s take an example of how cheque clearing takes place in the banking system.

Suppose I am paying an amount to you and my account is in ICICI bank and your account is in HDFC Bank. Then how does the cheque clearing happens? Refer to the above diagram.

The payer is paying the cheque to the receiver. The receiver receives the cheque and deposits in his bank. the cheque then goes to the clearinghouse. The clearinghouse then clears the cheque and the amount is deposited in the receiver’s account.

Having said that, the same thing happens with the stock market but the difference here is instead of payer and receiver we have buyer and seller. For all the banks there is a common clearinghouse but there are different clearinghouses for each stock exchange.

I hope you have understood all the 3 phases.

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