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What is Trade Settlement?

In a secondary market, the trading and settlement procedure begins with the choosing of a broker or sub-broker and finishes with the settlement of shares. To trade on the secondary market, you must first open a Demat account with a broker or bank. You can buy and sell securities after your account is operational. Your deal is settled once your order is executed and you receive a contract note.

Trade Settlement

Following a trade of stocks, bonds, futures, or other financial assets, trade settlement is the process of moving securities into a buyer's account and cash into the seller's account. Stocks over here are usually settled in three days.

What is the Settlement Date?

When a security is purchased or sold, two important dates are involved: the transaction date (also known as the trade date) and the settlement date.

The transaction date is the day on which a transaction takes place, whereas a settlement date is the day on which the transaction is completed; that is, the buyer receives possession of the security. It's vital to note that the settlement does not occur on the same day as the transaction because it takes time to deliver the security and transfer payment for it.

What is Settlement in Stock Market and the Different Types?

There are two types of stock investment settlements that you will encounter:

Spot Settlement:-

Forward Settlement:-

This form of settlement is done immediately after the T+2 rolling settlement principle has been applied.

This settlement is used when you agree to settle the trade at a later time, which could be T+5 or T+7.

Meaning of Rolling Settlement

The trade is settled in the days after the trade-in a rolling settlement. With this type of settlement, trades are finalized in T+2 days, meaning that deals are closed after the second working day. This time range excludes Sundays, Saturdays, Bank Holidays, and Exchange Holidays. 

As a result, a trade completed on Tuesday will be closed on Thursday. Similarly, if you buy a stock on Friday, you must pay the broker on the same day, but the shares will be deposited in your account on Tuesday. When your trades are settled, you become the shareholder of record.

The equities settlement day is crucial for dividend-seeking investors. The buyer must settle the trade for a profit before the record date if he wishes to receive a dividend from the corporation.

What is trade settlement process on BSE?

Mentioned below are the steps of settlement by the Bombay Stock Exchange:

  • The shares on the Bombay Stock Exchange (BSE) are all settled in T+2 days.
  • T+2 days are also used to close government securities and fixed income instruments for individual investors.
  • When you buy or sell securities, you pay in and out on the same day of the trade.
  • After the BSE completes the pay-out of monies and securities, the client deposits the securities within one working day.

Read more: Clearing and Settlement Process in Stock Markets

What is the trade settlement in NSE?

The National Stock Exchange's (NSE) rolling equity settlement cycle is as follows:

  • Rolling Settlement Trading - T
  • Clearing, which includes confirmation of custody and delivery generation - T+1
  • Securities and Funds for Settlement Payments in and out - T+2
  • Post Settlement Auction - T+2
  • Auction Settlement - T+3
  • Reporting for Bad Deliveries - T+4
  • Rectified Bad Deliveries Pay-In-Pay-Out - T+6
  • Bad Deliveries are being re-reported - T+8
  • Re-Bad Deliveries are now closed - T+9

Settlement Violations

Settlement violations occur when purchases are completed, but there is insufficient settled cash in the investor's account on settlement day to cover the trade. If the investor fails to submit funds by the settlement date, the brokerage business is responsible for settling the contract. 

If a brokerage does not receive payment for purchase before the settlement date, the brokerage may sell the asset (thus cancelling the transaction) and penalize the investor for any losses coming from a decrease in the security's market value. Interest or fees may be charged by a brokerage.

Although many brokerages establish margin accounts to allow clients to borrow money to buy securities, many of these accounts only allow an investor to buy a security if the account has enough settled cash to pay the trade's cost.

What is Trade Settlement? - FAQs

Q1. What is meant by trade settlement date?

The settlement date is when a transaction is complete, and the buyer must pay the seller while the seller will transfer the assets to the buyer.

Q2. Can I sell my stock before the date of settlement?

Settled funds are defined as cash or the sale proceeds of fully paid for securities. Since no effort was made to deposit extra cash into the account prior to the settlement date, liquidating a position before it was ever paid for with settlement is considered a violation.

Q3. Who are the participants that are involved in the process of settlement?

The participants are involved in clearing corporations, clearing members, custodians, depositors, clearing banks, and professional clearing members.

Q4. What constitutes a poor delivery?

A poor delivery occurs when a share transfer is not completed due to a violation of the exchange's rules.

Q5. What are the terms "pay-in" and "pay-out"?

The buyer provides money to the stock exchange, and the seller sends the securities on the pay-in day. The stock exchange delivers the money to the seller and the purchased shares to the buyer on pay-out day.

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