A great person once quoted that there are only two ways to become a Billionaire:
- Invest in the Stock Market
- List your Company on Stock Market
No matter how you interpret this quote, it is tied by the thread called “Stock Market”.
Buying and selling of Stocks in the market are a little bit different than buying a commodity from the grocery store. The actual process has changed and became very simple and faster in recent periods. Below, we tried to explain the actual process of – How stock is Bought and Sold in the market?
So to buy/sell a share of any public listed company on BSE or NSE, you will need 4 things:
DEMAT means De-Materialisation. Here in the context, it means conversion of Physical paper shares into paperless Electronic shares. We can open this with any Broker or now even at some banks. The shares you own will be in your DEMAT account.
Exclusively made with a Broker. We put the money for trading in the trading account. Suppose we want to purchase shares worth Rs. 1000, then we need to make sure that our trading account has a balance of minimum Rs. 1000 ( Please note money may be more if additional taxes and brokerage fees are included)
Any Savings account where you have an account will do.
Money in that Savings account 😉
Once you have all the 4 items of the above list, you are set to go!
So assuming you have the money in hand. Put it into your Savings account. Transfer it to your trading account.
Key roles of Offices/People involved in the process of Investing
Let me tell you in advance about the process parts and the involving team. Let us understand a bit about each one before going into further details. As you can see in the flow diagram Fig. 2, there are 4 parties involving with Investor(us):
As you are just starting, it is highly recommended to select the conventional stockbroker as against discount broker. Why? This is because you are just starting out. You need to learn a lot many things. Your regular conventional broker will help you with almost all the things relating to trading, paperwork, and process to be followed. (Probably also will save you from making costly mistakes like Short selling the stock in intraday & not covering the position, and others.) When you become an expert and confident then go for Discount Broker.
There are many Stock exchanges in India, but there is mainly two where majority trading and a listing of Companies happen are NSE (National Stock Exchange) and BSE (Bombay Stock Exchange). Both exchanges have a market index for Investors to get an overall idea of the whole market. There are mainly two market indexes: Nifty for NSE and Sensex for BSE.
A trade is initiated when a buy order is matched with a relevant sell order. There is a central counterparty in between the buyer and the seller, acting as a buyer to every seller and a seller to every buyer giving them the guarantee of the settlement of trades. This process is called novation. Clearing corporations also maintain funds for guaranteeing trades, settlement (in case a buyer or a seller defaults). There are mainly 2 Clearing houses in India for Shares’ trading: National Securities Clearing Corporation Ltd (NSCCL) and Indian Clearing Corporation Ltd (ICCL)
Depository and Depository Members:
Depository act as a link between the listed Company and the Investor. Earlier before the Introduction of Depository Act 1996, Investors had to keep on checking if the shares got updated or not. There existed a lot of risks in such a case. Now, things have become a more secure, paving way for even Foreign Investors to find interest in the Indian Stock Market. There are 2 Depositories in India, namely National Securities Depository Limited (NSDL) and Central Depository Services Limited (CDSL).
Trading and Settlement Cycle
Now you must have understood about each entity involved in the game. Let’s connect those dots and create a pattern to understand the whole flow of the process of “trading” leading to “settlement”.
Let’s understand with an example, let’s say, Rahul wants to purchase 100 shares of Reliance. He has set everything as per our earlier list of requirements. He has got a Savings account, DEMAT account, Trading account, and Cash too.
He has put his money into Savings account. From there, he transferred the required amount for 100 shares to his Trading account. He looks for the shares listed on NSE and contacts his broker to make a BUY call. The Broker will access his money and trigger the deal with the Exchange. This order initiating part is called Trading.
Now let us assume that the trading took place on T day (let’s say it is Monday). The order is successfully placed. Money is deducted from my trading account.
On T+1 day (Tuesday), NSCCL and ICCL, wholly owned subsidiaries of National Stock Exchange and Bombay Stock Exchange respectively come into the picture. They check for :
- They match the buyer and seller and initiate the debit or credit process
- Once matching is done they assure no default of either money or of shares occurs
So on Tuesday nothing much importance to be done by Rahul(Investor) happens. Still, it is an important day of the process. The Clearing house approves the deal and the process is taken for further Settlement part.
On T+2 day i.e. Wednesday, around in the evening or maybe in the afternoon, shares will be credited in (or debited when you sell ) Rahul’s“DEMAT account” by the Depository Offices, if everything goes well smooth. Rahul is now the proud owner of that stock. Everything is done smoothly.
This process will successfully happen almost all the time and Rahul will get his stock every time. But wait…there’s a catch. There is still a possibility that the Exchange couldn’t get shares from the seller or the seller defaulted. A rare but still possible scenario.
What will happen to Rahul? Won’t he get his shares which he purchased? Who is responsible to regulate such cases and help Rahul?
The Answer is Exchange Itself!
The Exchange takes the situation under their arms and fetches to get 100 shares of Reliance for Rahul. They keep an auction to purchase shares of Reliance. They announce this to the concerned audience mostly Insiders. The Exchange gets the shares at the current price at which it is been traded on the Auction day.
Now two question arises. What if the share price increases? And what if it decreases?
Let’s assume the stock price of Reliance is increased. It has increased the above Rahul’s purchasing price. In this scenario, the seller who defaulted and didn’t fulfilled his obligation of providing the stocks will be penalized. He will not only be paying the difference amount but also the additional penalty levied by the exchange. Rahul will be unaffected by this. He will get his purchased number of shares.
What happens if the Reliance’s price decreases. Again, Rahul will get his shares. The seller who sold the stock (at a higher price as compared to current lower price) will still need to pay the penalty. The difference between the prices, that extra money is put into the “Investors’ Protection Fund of the Stock Exchange”.
In nutshell, the seller has defaulted with his obligation of providing the Reliance’s shares. So he’s the one who will be bearing all the costings and penalties.
Then now it is awarded to Rahul on T+3 day (Thursday). Though he may be worried these days because of not seeing the bought stocks, he surely will be happy after seeing them in DEMAT account. 🙂
In a nutshell, it took 4 days (Monday to Thursday)for Rahul to receive his Shares. But this isn’t the general case.
Normally, it should take only 3 days to get your transaction completed (Bad luck, Rahul!, Things happen.)
Also, keep in mind that T+2 days ie 3 days means if trading took place on a business day then 2 more business days. Weekends, Public holidays and Exchange holidays are excluded.
In a similar fashion, things can be understood from the seller perspective also.
So this was just a glimpse of how the process of the Buying and Selling transactions of shares actually work over Stock Exchanges. Hope you enjoyed.
Wish you Happy Investing!