10.1 - Overview

Clearing and settlement may seem abstract, but it is crucial to be able to explain the process. You don't have to worry about clearing and settlement as a trader, or investor. There are professional intermediaries that can do this seamlessly for you.

The lack of knowledge about clearing and settlement could create a gap in the learning process and make it difficult to see the big picture. We will therefore explore the details behind buying a stock and when it hits your DEMAT account.

This will be kept very practical, with an emphasis on the essential knowledge you need to know as a market participant.

10.2 - What happens if you buy stock?

Day 1: The trade (T Day), Monday

Let's say that you purchase 100 shares of Reliance Industries at Rs.1,000 per share on Monday, 23 June 2014. The total value of the purchase is Rs.100,000. (100 * 1000). The trade date is the day that you complete the transaction, represented by 'T Day'.

Your broker will debit your account with Rs.100,000.00 and any applicable charges at the end of the trading day. If the trade was executed via Zerodha then the applicable charges would be the following:

(Chart)

The transaction will result in a debit from your trading account for Rs.100,000.00 plus Rs.103.93/ (which includes all applicable charges) of Rs.100.103.93.93. The money will be deducted from your trading account but not the stock.

A 'contract note' is also generated by the broker and sent to you. A contract note is a document that details every transaction you have made. It is a valuable document and one that you should save for future reference. A contract note usually shows the transaction breakdown and trade reference number. It also lists the breakdown of brokerage charges.

Day 2: Trade Day + 1 (T+ Day, Tuesday)

T+1 is the day following the transaction. T+1 is the day you can sell the stock you bought the day before. YYou can do this by making a quick trade known as "Buy Today, Sell Tomorrow", or "Acquire Today and Sell Tomorrow"(BTST & ATST respectively). Keep in mind that the stock may not yet be in your DEMAT account. There is always risk when selling stock you don't own. It doesn't mean that every time you make a BTST trading, you will get in trouble. But it can happen, especially if you trade stocks in the B group or illiquid. This is a complicated topic, so we won't touch it now.

If you are new to the market, I recommend that you avoid BTST trades unless your understanding of the risks involved.

Your perspective is that nothing happens on T+1 day. The exchange collects the money needed to buy the shares and security transaction tax.

Day 3 - Trade Day + 2 (T+2 day, Wednesday)

Around 11 AM, shares are debited from the person who sold the shares. The brokerage with which you trade will credit the funds to your DEMAT account. The money taken from you is also credited to the person selling the shares.

Now, the shares will start to reflect in your DEMAT account. This indicates that you now own 100 shares.

Practically speaking, if you purchase a share on T Day, the shares will be available in your DEMAT account by T+2 Day. T+3day is the deadline for transactions.

10.3 - What happens if you sell a stock

The trading day is the day that you sell stocks. It's also known as "T Day". Stocks become blocked when you sell them from your DEMAT account. The exchange receives the block shares before the T+2 day. After deducting all applicable fees, you will receive the funds from the sale on T+2.

To Summerize

It is the date you complete a transaction. This is represented by 'T Day.
A contract note must be issued by the broker for any transactions that were completed before T day.
By the end of T+2 days, your DEMAT account will reflect the purchase of a share.
All stock/equity settlements in India are done on a T+2 basis.
Shares that are sold immediately become unblockable and the proceeds of the sale are credited on T +2 days.