A number of our readers have been asking us about the basics of the stock market. Would they get the money instantly if they sell shares is a frequently asked question. The answer to that depends on the settlement cycle.
Here are six commonly asked questions regarding it.
What is settlement?
After you have bought or sold shares through your broker, the trade has to be settled. Meaning, the buyer has to receive his shares and the seller has to receive his money.
Settlement is just the process whereby payment is made by all those who have made purchases and shares are delivered by all those who have made sales.
Who ensures the settlement?
The stock exchange ensures that buyers who have paid for the shares purchased receive the shares.
Similarly, sellers who have delivered the shares receive payment for the same.
The entire process of settlement of shares and money is managed by stock exchanges through the clearing house. The clearing house has been formed specifically to facilitate the transfer and ownership of shares and ensure the process of settlement takes place smoothly.
What is a settlement cycle?
The period within which the settlement is made -- the period within which buyers receive their shares and sellers receive their money -- is called a settlement cycle.
How many times can one buy and sell within a settlement cycle?
It's possible to by and sell within a settlement cycle many times, which is what traders do. They settle only their net outstanding positions at the end of the cycle.
Let's say these are the transactions you have made in a settlement cycle:
Bought 100 HLL
Sold 50 HLL
Bought 100 Infosys
Bought 50 Gujarat Ambuja
Sold 150 Gujarat Ambuja
Then at the end of the settlement cycle, you will receive 50 shares of HLL and 100 of Infosys and receive money for selling a net 100 shares of Gujarat Ambuja.
In other words, the settlement is made for the net outstanding positions at the end of the settlement cycle.
Formally, therefore, a settlement cycle refers to a calendar according to which all purchase and sale transactions done within the dates of the settlement cycle are settled on a net basis.
What are rolling settlements?
In a rolling settlement, each trading day is considered as a trading period and trades executed during the day are settled based on the net outstandings (the above answer explains net outstandings) for the day.
At present, trades in rolling settlement are settled on a T+2 basis, ie on the second working day.
For arriving at the settlement day, all intervening holidays -- bank holidays, National Stock Exchange holidays, Saturdays and Sundays -- are excluded. T+2 means that trades are settled two working days after the day the trade takes place.
For instance, trades taking place on Monday are settled on Wednesday, Tuesday's trades settled on Thursday and so on.
How is the schedule followed?
The time schedule prescribed by the Securities and Exchange Board of India, the market watchdog, for implementation of T+2 rolling settlements, beginning from April 1, 2003, is as follows:
Trade Day = T
T+1
By 11:00 a.m. - Confirmation of all trades
By 1:30 p.m. - Processing and downloading of files to brokers / custodians
T+2
By 11:00 a.m. - Pay-in of securities and funds
By 1:30 p.m. - Pay-out of securities and funds
Putting it simply, if you sell shares, the money is received by your broker on the third day. If you buy shares, your broker gets them on the third day.
Usually, you'll be able to get your money or your stocks from your broker on the day after he receives it.