Steps from Order Placement to Settlement of Equity Shares in an Online Trading Platform of an Indian Stock Exchange
In India, trading of equity shares takes place through online platforms connected to stock exchanges like the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE). The process from order placement to settlement is systematic and well-regulated, involving several key stages to ensure smooth transactions. This process is governed by the Securities and Exchange Board of India (SEBI) and the rules of respective stock exchanges. Below is a detailed explanation of the various steps involved.
1. Opening a Demat and Trading Account
Before engaging in any trading activity, an investor must open two accounts:
- Demat Account: This account holds the shares in electronic form. It is mandatory for all investors to have a demat account to trade in the stock market.
- Trading Account: This account is used to place buy or sell orders for securities on a stock exchange. It acts as a bridge between the investor and the stock exchange.
To open these accounts, investors must submit the required documents, undergo a KYC (Know Your Customer) process, and sign an agreement with a registered stockbroker. The trading account is linked to the demat account so that the securities purchased can be credited to the demat account, and the securities sold are debited from it.
2. Order Placement
Once the trading account is operational, the investor can place an order through the online trading platform provided by the broker. There are two types of orders:
- Market Order: An order to buy or sell shares at the current market price.
- Limit Order: An order to buy or sell shares at a specific price or better. If the specified price is not available, the order remains unfulfilled.
The investor selects the stock to trade, enters the number of shares to buy or sell, and specifies whether the order is a market or limit order. The order is then transmitted to the stock exchange via the broker’s system.
3. Order Matching and Execution
After the order is placed, it enters the order book of the stock exchange. The stock exchange system matches the buy orders with the sell orders based on price and time priority:
- Price Priority: Orders are matched based on the best price available.
- Time Priority: If two orders have the same price, the order that was placed earlier is executed first.
For example, if an investor wants to buy 100 shares of a company at INR 500 per share, and another investor wants to sell 100 shares at the same price, the order will be matched. Once matched, the order is executed, and the trade is confirmed.
4. Trade Confirmation
Once the order is executed, the trading platform provides a trade confirmation. This confirmation includes details such as:
- Stock name and symbol.
- Number of shares traded.
- Price at which the trade was executed.
- Date and time of the trade.
This confirmation is sent to the investor's registered email or through the trading platform. For a seller, the shares are debited from the demat account, and for a buyer, the shares are credited to their demat account upon settlement.
5. Clearing and Settlement
After execution, the trade enters the clearing and settlement process, which ensures that the delivery of securities and funds is completed smoothly between the buyer and the seller. This is handled by the Clearing Corporation of India (CCIL).
- Clearing: The clearing process involves the calculation of obligations (how many shares the buyer owes and how much money the seller owes). The clearing corporation acts as an intermediary between the buyer and the seller. It guarantees the settlement of the transaction and ensures that the buyer receives the shares, and the seller receives the payment.
- Settlement: Settlement refers to the final exchange of securities and funds. In India, the T+2 (Transaction plus two days) settlement cycle applies. This means that the trade will be settled two business days after the transaction date.
6. Transfer of Shares and Funds
- For the Buyer: On T+2, the buyer’s demat account is credited with the shares they purchased. The funds to pay for the shares are debited from the buyer's linked bank account, via the stockbroker, on the settlement day.
- For the Seller: On T+2, the seller’s demat account is debited for the shares sold. The proceeds from the sale are credited to the seller’s bank account, again through the stockbroker.
7. Role of Custodians and Brokers
The role of custodians and brokers is crucial in the entire process. Custodians manage the settlement of securities on behalf of institutional investors and ensure that securities are transferred correctly. The broker, acting as an intermediary between the investor and the stock exchange, plays a critical role in order execution, clearing, and settlement. They provide the platform for order placement, route the orders to the exchange, and ensure the timely settlement of trades.
8. Delivery and Payment
The buyer and seller receive the final delivery of securities and payment after the completion of the settlement process. On the settlement date (T+2), the following takes place:
- For the Buyer: The shares purchased are credited to the buyer's demat account.
- For the Seller: The money for the shares sold is credited to the seller's bank account.
This concludes the transaction, and the process is considered fully completed.
9. Corporate Actions
After the settlement, any corporate actions such as dividends, bonus issues, or rights issues that apply to the shares will be processed by the Depository Participants (DPs), and the investor will receive the respective entitlements in their demat account.
10. Regulatory Oversight
Throughout this entire process, SEBI ensures that all market participants comply with regulatory requirements. SEBI also sets rules for fair and transparent trading, ensuring that investors are protected against market manipulation and fraud.
Conclusion
The entire process of equity trading from order placement to settlement is a well-structured, multi-step operation. It involves coordination between the investor, the stockbroker, the stock exchange, the clearinghouse, and custodians to ensure that trades are executed and settled efficiently. With advancements in online trading platforms, the process has become faster and more accessible to individual investors, fostering greater participation in the stock markets. The adoption of the T+2 settlement cycle ensures timely and secure transfer of funds and securities, reinforcing trust in the Indian stock market.
Subscribe on YouTube - NotesWorld
For PDF copy of Solved Assignment
Any University Assignment Solution
.webp)
