stock market

Clearing and settling process: Shares bought

Trading in the stock market is not a hassle anymore. The introduction of broker firms offering exclusive trading services lets you make decisions conveniently. There is no need to keep an eye on the trading trends every day. All you need to do is to have a simple idea of how the job is done and who the clearing and settling entities are.

To start trading on a reputed online platform, you will have to open new demat account and link your bank account for a credit transaction. Here is the day-by-day clearing and settling process followed.

  • Day 1

Suppose you have bought 50 shares of ABC at Rs 100 per share. The day you purchased the shares will be denoted as Day 1 or Trade Day (T Day). Once this day ends, your linked bank account will be debited Rs (50 x 100) = Rs 5000 + brokerage charged by the service provider. The service charges vary from firm to firm.

The stocks will not reach your Demat account. A contract is formulated and shared by the broker on Day 1. It will contain the details of the transaction done.

  • Day 2 or T+1 Day

Your money is still debited but you did not receive the shares. Due to the legal contract issued, you can still transact and sell the shares you have purchased yesterday. On this day, the stock exchange will collect the debited amount from the broker.

  • Day 3 or T+2 Day

This is the 2nd day after your purchase. It is termed T+2 Day. On this day, shares will be transferred to the broker’s entitled account from the ones who have sold them. Your trade assistant will credit it to your account. The debited amount from your bank account will be credited to the seller’s account.

Clearance and settlement process: Shares sold

You already have a free online trading account. You have already made a purchase and want to sell shares.

  • Day 1 or T Day

You have 50 shares of ABC costing Rs 100 each. It means you have invested Rs 5000 in it. The purchase day is termed Trade Day (T Day). 

When you want to sell these shares, they will be blocked in your registered account instantly. The same shares cannot be sold again.

  • Day 2 or T+1 Day

On the second day, the broker will take these shares and deposit them on the stock exchange. The price is received by the broker from the stock market.

  • Day 3 or T+2 Day

On the third day, the amount will be credited to your Demat account after deducting all the service charges involved.

Details of the process

We can observe that there are three steps involved in this process. Let us elaborate on them.

  • Trading

A stock exchange uses an electronic order system to match the buying and selling volumes of thousands of traders.

Imagine the stock of ABC is being traded. When you want to buy ABC stocks, the costliest buying price is chosen whereas the cheapest selling price is picked for it. 

Even if they buy and sell prices match, the seller must have the order volume to match the buyer’s demand. The quantity of stock available is called market depth. It is created by brokers collecting orders from investors and passing them to the respective stock exchange. 

  • Clearing

We can understand that the buy and sell orders have to match for execution. Once they match, the clearing process begins. It is managed and monitored by independent entities called clearing houses. 

  • Settlement

The financial obligations are then settled for buyers and sellers. The buyer received the security ordered and the seller receives the relevant amount. 

Participants of this stock trading process

  • Clearing corporation – The National Securities Clearing Corporation Limited (NSCCL) is the designated authority.
  • Clearing custodians/members – This member is responsible for determining the position of a share suiting whether it is suiting the trade or not.
  • Clearing banks – The settlement of funds for buying and selling is done by clearing banks.
  • Depositories – The Central Depository Services Limited (CDSL) and the National Securities Depository Limited (NSDL) hold Demat accounts. Clearing members also maintain a pool account for clearance.

Read also:- Introduction To Forex Day Trading For Beginners


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