TRADING AND

SETTLEMENT PROCEDURE
AT NSE/BSE
 What Is Stock Trade Settlement Process?

• In the stock market, there is always a buyer and a seller. So, when
a person buys a certain number of shares, there is another trader
who sells the shares.
• This trade is settled only when the buyer receives the shares and
the seller receives the money.
Let’s see in detail how the process takes place.
There are three phases in a secondary market transaction:
 Trading
 Clearing
 Settlement
 Introduction to Trading
Stock exchange has basically three tasks performed in process of buying and selling of
securities.
 Trading basically deals with putting an order and its execution.
 Clearing deals with determination of obligations, in terms of funds and securities.
 Settlement means that the trade will be completed and NSCCL acts as acounter party and
takes obligation for the same. It has created a faith in theinvestors that all trades would be
settled and in no case any investor willhave to face any problem of insufficient funds and
securities.
 Trading

In the stock market, a large number of trades occur simultaneously. The stock exchanges
use an electronic order matching system to match ‘buy’ and ‘sell’ orders from different
traders. This way, each trade is executed.For instance, imagine that stock ‘X’ is trading in
the stock market .

The buy and sell orders for this stock are as follows:
Here the costliest buy prices are matched against the cheapest available sell prices, and
whenever the buy price is less than or equal to the best available sell price a match is done.
This of course also depends on the respective quantities available in the market across
buys and sells and is known as market depth.

So even if a particular price may result in a match, if there is not enough quantity available
at the seller side at that price, the buy order will still not be fully traded.

The market depth is created by brokerages who collect orders from different investors and
pass it on to the stock exchanges, most likely to be the two most popular exchanges in
India—the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). In
this process, brokerages act as the intermediary between the investor and the stock
exchange.
 Clearing
Once two orders match and a trade is executed, the clearing process takes place. Clearing is
the identification of what security is owed to the buyer and how much money is owed to the
seller. The entire process is managed by ‘clearing houses’. These are independent entities.
For example, imagine that there are two traders: Ramesh and Suresh.

However, in the real market scenario, traders tend to conduct multiple transactions. As a
result, the clearing house identifies all the transactions and the net amount or net securities
owed to the trader are calculated.
 Settlement

The next step is to fulfil the financial obligations identified in the clearing
step. This involves the transaction settlement for the buyers and sellers.

So once the buyer receives the security and the seller receives the payment,
the transaction is settled.
 Role of Depositories and Depository Participants
(DPs)
In this entire process, there is another important intermediary known as the depository.
A depository is an institution that holds and facilitates the exchanges of securities.
In India, there are two depositories are the National Securities Depository Limited (NSDL)
and the Central Depository Service (India) Limited (CDSL).
These depositories allow brokers to deposit securities so that activities such as book entry and
record keeping services can be performed.In order to trade in the secondary market, the
security should be held in electronic form by the investor. DPs or Depository Participants
(usually your broker firm) act as intermediaries between the depository and the investor. They
are involved in the dematerialisation and transfer of securities.
In addition, the settlement of securities is done through the demat account that the investor
holds with the DP.
STEP 1:Finding a Broker
When a person wishes to trade in the stock market, it cannot do so in his/her
individual capacity. The transactions can only occur through a broker or a sub-
broker. So according to one’s requirement, a broker must be appointed.
A broker acts as an intermediary or a mediator between the investor and the stock
exchange. The work of a broker is transfer of order electronically from the
investor to the exchange. Any transaction that occurs in stock market is taken
care by the stock exchange.
Now such a broker can be an individual or a partnership or a company or a
financial institution (like banks). They must be registered under SEBI. Once such
a broker is appointed you can buy/sell shares on the stock exchange.
STEP 2:Opening Account With the Broker
Since the reforms, all securities are now in electronic format. There are no issues of
physical shares/securities anymore. So an investor must open a dematerialized account,
i.e. a Demat account to hold and trade in such electronic securities. So the broker will
open a Demat account with the depository participant.
The two depository participants as we know namely Central Depository Services Ltd.
(CDSL) and National Depository Services Ltd. (NDSL).

A broker always opens a trading account in the name of the investor/ client only if he/she
is satisfied about the credit worthiness of the client.
The minimum requirement for opening a trading account is PAN card, and bank account
failing to which the account cannot be opened.
STEP 3:Placing Orders
And then the investor will actually place an order to buy or sell shares. The order will
be placed with his broker, or the individual can transact online if the broker provides
such services. One thing of essential importance is that the order /instructions should
be very clear.
Example: Buy 100 shares of XYZ Co. for a price of Rs. 140/- or less.

Then the broker will act according to your transactions and place an order for the
shares at the price mentioned or an even better price if available. The broker will
issue an order confirmation slip to the investor.
STEP 4:Execution of the Order

The orders are executed by the broker on behalf of the clients. The buy orders must
tally the sell orders if not then the broker will sell/buy to match the order.
For this the broker charges an amount. Normally in an electronic platform the
execution occurs automatically.
 STEP 5:Preparation of Contract Notes
A contract note is a written agreement between the broker and the investor for smooth
execution of the transaction. A contract note is sent through an automated message and
via mail through the registered phone and mail respectively by the end of the day.
However it varies from broker to broker and the timing varies.A contract contains the
transaction name, brokerage charges, trading on BSE/ NSE, SEBI registration number of
the broker, settlement number and a digital signature by the broker.
Below is the portion of a contract note, showing the final amount to be paid by the client .

So, it shows that the client has to pay Rs. 115.50 for the transaction that he has done
inclusive the taxes. The amount is debited directly from the client’s account.
 STEP 6 : Settlement
Here the actual securities are transferred from the buyer to the seller. And the funds
will also be transferred. Here too the broker will deal with the transfer.

There are two types of settlements:

1. On the Spot settlement: Here we exchange the funds immediately and the
settlement follows the T+2 pattern. So a transaction occurring on Monday will be
settled by Wednesday (by the second working day)

2. Forward Settlement: Simply means both parties have decided the settlement
will take place on some future date. It can be T+% or T+9 etc.
Mechanism of trading

OPENING AN PLACING
ACCOUNT WITH THE ORDER
BROKER

PREPARATION EXECUTION
OF CONTRACT OF THE
NOTES ORDER
 Thank you
SUBMITTED BY
HANSA
AGRAWAL
031702008