In the stock market, when a trade is placed to buy or sell a security, it is not completed instantly. The actual transfer of ownership, known as trade settlement, takes place after the transaction is confirmed. This settlement involves two key parties—the buyer and the seller—who exchange the agreed securities and funds through a clearing corporation. The duration between trade execution and settlement is generally referred to as the settlement cycle.
In India, many trades are settled on a T+1 basis. This means the settlement takes place one business day after the trade date. For example, if a stock is bought on Monday, the buyer will receive the shares on Tuesday, and the seller will get the money. This process ensures transparency, reduces risks, and helps maintain order in financial markets. Understanding what is trade settlement helps investors track when they actually gain ownership of the asset they have traded.
What is the Settlement Date?
The date on which your trade settles is called the settlement date or the date of trade settlement payment. The transaction date is denoted by "T", and the settlement date typically takes "T+2" days. A trade settlement date ensures no delay in executing the transaction. The settlement period ensures the clearing agents get sufficient time to ensure the proper transfer of shares and cash.
What is Settlement in Stock Market and the Different Types?
There are types of settlement in stock market. Settlement is the final stage related to a trade order and can be categorised as follows:
Spot Settlement -
A spot settlement allows for a trade settlement immediately following the T+2 rolling settlement principal.Forward Settlement -
A forward settlement might be used to settle a trade in the future on T+5 or T+7.
Meaning of Rolling Settlement
A rolling settlement involves the trade settlement being made in the successive days of the trade. A rolling settlement typically takes T+2 days. Let us look at a T+2 settlement example. If you place a buy order on a Monday, the shares will get credited into your account by Wednesday, assuming there is no holiday and the markets are open from Monday through Wednesday. Similarly, buying a stock on a Friday lets the shares get deposited into your account the following Tuesday.
What is trade settlement process on BSE?
Now that you know what trade settlement is, let us understand the settlement process on the BSE. All securities comprising the equity segment, government and fixed-income securities are settled on the BSE in "T+2" days. As per the BSE regulations, the pay-in and pay-out of monies and securities must be completed on the same day. After the BSE conducts the pay-out of funds and securities, it takes up to one working day to deliver securities and client payment.
What is trade Settlement in the NSE?
The trade settlement process on the NSE is described as follows.
Working Days | Activity |
T | Rolling settlement trading |
T+1 | Clearing (This includes custodial confirmation and delivery generation) |
T+2 | Settlement through securities and funds pay-in and pay-out |
T+2 | Post settlement auction |
T+3 | Auction settlement |
T+4 | Reporting for bad deliveries |
T+6 | Pay-in-pay-out of rectified bad deliveries |
T+8 | Re-reporting of bad deliveries |
T+9 | Closing of re-bad deliveries |
Settlement Violations
Settlement violations comprise cases wherein a trade is completed, but there is insufficient settled cash in the investor's account. The brokerage firm settles the contract if an investor does not submit the required funds by the settlement date. The brokerage firm may sell the investor's assets and penalise them for losses arising from a security value loss. The brokerage may even charge a particular interest or fee along with the penalty.
Conclusion
Trade settlement is the final step in a securities transaction, where the buyer receives the securities and the seller gets the payment. It ensures the proper transfer of ownership and timely movement of funds. Following the settlement timeline is essential to avoid penalties and maintain smooth trading activity. Understanding this process helps investors stay informed, fulfil their responsibilities, and avoid any delays or violations in the financial markets.