To ensure smooth and error free operation with minimal risk, regulators in India have designed a trading cycle, as well as, clearing and settlement process. To buy and sell shares you need a DEMAT and trading account. DEMAT account is where you store your share certificates in digital format and trading account is used to place buy and sell orders.
In addition to these two, you are also required to have a bank account for monetary transactions.
Let us understand the whole clearing and settlement process that works in the stock market.
Assume on 16-03-2022, you have invested your money by buying 100 shares of Infosys at a price of Rs. 1,800 per share. The day you purchase the shares is called the “Trade Day” or the “T Day”.
By the end of the T day, your broker will debit Rs 1,80,000 (i.e. 100 shares multiplied by Rs. 1,800 per share) and other applicable charges for your purchase.
Now money is out of your trading account to the broker’s account, but you have not yet received stocks to your DEMAT Account linked to the trading account.
On the T day, the broker generates a contract note and sends you a copy to your registered e-mail. The contract note will have details of the transaction you made on that day.
The day after you made the transaction is called T+1 day.
On day 3 (i.e. the second day after the date you purchase the shares), or the T+2 day, shares are credited to your broker’s account from the person who sold you the shares. By the end of T+2 day, the broker, after receiving the shares, will credit 100 shares of Infosys to your DEMAT account.
On the T+2 day, Rs. 1,80,000 is credited to the seller’s bank account. Rs. 1,80,000 was earlier collected from your account on the day of share purchase.
This means by the end of T+2 day, the shares will start reflecting in your DEMAT account.
Similarly when you sell stocks, the day when you sell is called the trade day. After selling your stocks, it gets blocked in your DEMAT account. On T+2 day the blocked shares are given to the buyer and in return you receive the fund from the sale to your trading account after deduction of all applicable charges.
Settlement holidays are when markets are open but settlement of your trades do not take place as per the usual T+2 cycle because either the depositories (NSDL and CDSL) are closed or banks are closed on that day.
Since the settlement date denotes the final transfer of ownership of shares and not the day you made the trade, a holiday in between causes a delay in the final transfer of shares.
If the settlement holiday is on Monday, 16th May 2022, then all trades placed on 13th May 2022 (friday) and 16th May 2022 (Monday) in the Equity segment will be settled by 18th May 2022. This means, 16th May 2022 will not be considered in T+2 days calculation.
You can check a list of future settlement holidays here
In India, the settlement cycle in the case of Futures & Options (Equity, commodity, currency) is T+1 day.
- The day you make a transaction is called the Transaction Date or Trade Date or represented by ‘T day’. On the transaction date, the broker issues you a contract note for all the transactions carried out.
- Shares bought by you will reflect on your DEMAT Account by the end of T+2 day.
- When you sell, shares are blocked immediately and the sale proceeds credited to your trading account by the end of T+2 day.
Update: We are transitioning to the T+1 settlement mechanism system, which means that the ex-date and Record date will be the same from Jan 2023.
In addition to the disclaimer below, please note, this article is not intended to provide investing or trading advice. Trading in the stock market and in other securities entails varying degrees of risk, and can result in loss of capital. Most investors and traders lose money. Readers seeking to engage in trading and/or investing should seek out extensive education on the topic and help of professionals.