The Indian stock market and its included investment instruments have always been one of the most sought-after investment options for investors. Investors start by buying stocks and make good profits over time based on the increase in share price or through dividend earnings. However, investing in the stock market is not as easy as it seems but can be made simpler by understanding how it works.
Investing in the stock market follows a set process created by the Securities and Exchange of India (SEBI). It is the top governing body that regulates the securities market in India. For any investor wanting to invest in the stock market, it is crucial to understand the trading procedure on a stock exchange and the clearing and settlement process in the stock exchange.
This article will provide you with a basic understanding of the Indian stock exchanges and how you can start your investment process by investing in various securities.
Stock exchange
A stock exchange is a marketplace that facilitates the buying and selling of various securities, such as stocks, bonds, mutual funds, etc. It is where companies or institutions list securities to ensure investors can buy or sell them at their convenience. In India, there are two main stock exchanges: the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE).
The Securities and Exchange Board of India regulates and manages stock exchanges and listed securities. Earlier, the trading procedure on a stock exchange involved shouting the names of securities, such as undervalued stocks, to buy while present on the trading floor of the stock exchanges. However, the process has entirely become digital and includes digital accounts such as Demat accounts.
Important terms in a stock exchange
- Bear: This is a speculator who takes a negative outlook on the state of a given market and predicts a decline in market prices.
- Bull: This is a speculator who adopts a positive view of the state of the market and predicts a rise in market prices.
- Broker: This is an individual who acts as a middleman and carries out all orders on transactions on behalf of the investor.
- Bonds: These are fixed-income securities that companies or the government issue to buyers in exchange for regular interest payments.
- Dematerialisation: This refers to the conversion of a physical certificate to an electronic one.
- Depository: This is an entity or a place that holds all securities electronically.
Trading procedure on the stock exchange
If you are wondering about the clearing and settlement process in the stock exchange under its trading procedure, here is a step-by-step guide:
1. Selection of broker
Any investor who wants to buy or sell securities must sign up with a SEBI-licensed broker, which can be a startup, a partnership, or an individual. You will need to submit some documents and provide personal information in the sign-up process, such as a PAN card, bank account details, name, address, date of birth, etc.
2. Opening a Demat account with a depository
Investors must open a Demat account with depository participants such as banks or stockbrokers to hold securities digitally. These depository participants open a Demat account on behalf of two depositories: CDSL (Central Depository Securities Ltd.) and NSDL (National Securities Depository Ltd.).
3. Placing the order
Once you have opened the Demat account, you can search for securities from the stockbroking platform and place an order to buy. You can also place an order by contacting your broker through email, phone, etc. When placing an order, ensure that all the information entered or communicated is correct.
4. Match the share and best price
If you have placed an order manually, you can look at the share price in real time to match your order with the best price. If you have asked the broker, they will go online to connect with the chosen stock exchange and match your order with the best share price.
5. Executing order
If the price you mentioned in your order matches the current share price, the order will be executed on the stock exchange immediately. Once the trade is completed, you will receive a trade confirmation slip from the broker.
6. Issue of contract note
Within 24 hours of the trade being executed, you will receive a contact note from the broker. It includes details of the executed order, such as the date and time of the execution, number of shares bought or sold, cost or selling price, order type, etc. It is compulsory for a broker to issue a contract note with every completed market order.
7. Delivery of share and making payment
The next step in the settlement in the stock exchange is to pay for the shares bought or deliver the shares sold. The investor must deliver or pay for the shares immediately after receiving the contract note. If it is a buy order, investors can make payments a day before the broker delivers the shares.
8. Settlement cycle
The next step in the trading procedure of the stock exchange is the clearing and settlement process in the stock market. The stock market generally follows a trading cycle of T+0 (used to be T+1). For example, if the order was executed today, the shares will be credited on the same day.
9. Delivery or shares or making payment
Once the clearing and settlement process in the stock market of T+0 is complete, the exchange will provide the payment that you sent to the seller. If you are the seller, the exchange will take the shares from your Demat account and transfer the payment to you.
10. Delivery of shares in Demat form
This is the final clearing and settlement process in the stock exchange. It includes the step where the exchange makes deliveries of the shares to your Demat account. However, it is important that you provide the details of the Demat account to the depository participant or the exchange.
Conclusion
Understanding the trading procedure of the stock exchange and what is settlement in the stock market are important steps for trading stocks, such as multibagger stocks, effectively. Once you have understood both the steps, you can open a Demat account and start investing in the equity market. However, make sure your investments are based on prior stock market knowledge and extensive research.
