Understanding the securities trade lifecycle
So, friends.. this is how it works…
It all starts with your decision to trade. You place an order in a stock exchange via your broker. The trade is executed at the stock exchange. But behind all this, there are many things happening such as trading, clearing and settlement. Let’s have a look at all these 3 areas..
So what is trading?
Simply put, when you buy or sell shares via the online terminal of your broker or via phone call to your broker or via mobile app of your broker, you enter into a trade. You might not know whose shares you bought or to whom you sold (this remains anonymous), but the exchange knows it all. You just get the trading confirmation and then the other processes such as clearing and settlement begins. At the back end (behind the scenes), the exchange which is the trading venue sends the trade for clearing to the clearing institution.
After the trades are cleared (clearing might be done by a clearing house), they are settled in a depository (such as NSDL -National Securities Depository Limited or CDSL – Central Depository Services Limited in Indian markets)
The funds payin-payout and securities payin-payout occurs at settlement.
So what is clearing? Let’s understand it..
With clearing, the net securities and net amount is arrived at. So suppose you have purchased 1000 shares of company A and then sold 100 shares and then sold 100 shares again. While doing this, you had spend Rs 1000 in buying and you received Rs 100 for selling and Rs 100 again for selling. So overall at the clearing stage, net obligation is that you have purchased 800 shares and you spend Rs 800. This is what happens at clearing.
So in India, clearing is done by institutions such as National Securities Clearing Corporation Ltd (NSCCL), Indian Clearing Corporation Ltd (ICCL) or MCX-SX Clearing Corporation Ltd (MCX-SXCCL). In United states, this is done by DTCC. A country might have one of more clearing organizations who get the trades from stock exchanges to clear the trades. And once the clearing process is over, the next step is to settle the trades. There are risks as well in clearing and settlement which are taken care by clearing organizations.
And what is settlement?
So, we were talking about Rs 800 and 800 shares. So, Rs 800 goes out from your cash account that you have with your broker and 800 shares are credited in your depository account. This is what settlement is! So, once the settlement has happened, your shares are legally held in a bank of securities which might be NSDL (NSDL is National Securities Depositories in India) or CDSL (Central Depository Services Limited in India). NSDL and CDSL are like banks of securities where the securities are legally held. These are also called as depositories. Not to be confused with custodians. Sometimes people get confused between custodians and depositories. To learn about the difference between custodian and depositories, check out our clarification here.
Also, check out this awesome video and learn more about how the entire trade lifecycle works (via an animation)
But this article is a very high level overview. All this is not as simple as it sounds. We will bring you the details regarding each of these areas such as what goes in trading, what happens in clearing and how the settlement process works.. All this in our next few articles.. Meanwhile, here are some FAQs you must check out regarding trading and settlement !
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