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.
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.
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.
There are two types of stock investment settlements that you will encounter:
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.
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.
Mentioned below are the steps of settlement by the Bombay Stock Exchange:
Read more: Clearing and Settlement Process in Stock Markets
The National Stock Exchange's (NSE) rolling equity settlement cycle is as follows:
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.