Everyone mostly knows trading very well as it is a process of buying and selling stocks in the share market. However, the trading cycle is something which can confuse many newbie traders and investors in the stock market. Let’s discuss the trading cycle in detail.
Table of Contents
Trading Cycle Meaning
The trading cycle is the way through which stocks in the Indian stock market are exchanged. It facilitates a smooth transaction among the investor and the firm. The procedure has changed through time, and now 99 percent of all transactions are completed digitally, making it efficient and simple.
Example
Mr. X invests in the XYZ corporation. He purchases ten stocks at Rs 1,000 each. On Monday, this action is carried out. The Trade Date is Monday and the date corresponding with it.
On the trade date ‘T,’ the broker deducts Rs. 10,000 from x’s account and issues him a Contract Note as evidence of the transaction.
All of the trade’s internal processing is completed on T+1 day. By the conclusion of the T+2 day, Mr. X will have stocks of Xyz in his DEMAT account.
If Mr. X had sold his shares instead of buying them in the scenario above, the stocks would have been blocked in his DEMAT account before T+2 day.
Before T+2 day, they would be transferred out of his DEMAT account and money will be credited on T+1 day.
Trade life Cycle Process
It involves three basic things. Let’s discuss them one by one.
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Trading
Trading is the act of buying or selling a firm ‘s stock. Depending on the company ‘s previous success and future prospects, the investor decides whether to invest or exit.
When an investor confirms an order and funds are debited or credited from or to his or her account for or against the company’s shares, trading is said to have taken place.
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Clearing
Clearing is the procedure of an entity acting as a mediator between a buyer and a seller to ensure a seamless payment and stock exchange. Clearing is required to match sell and purchase orders from different parties.
To prevent difficulties, investors transfer funds to the clearing firm rather than crediting the firm’s account. This allows for a seamless transaction and lowers the risk of cheating on both parties’ behalf.
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Settlement
The settlement is considered to have been completed when the investor’s demat account is credited with the shares he or she purchased, or when the money received on selling the stocks is deposited to the investor’s bank account.
After meeting all essential funds transfer requirements, clearinghouses provide the green light for the settlement of stocks or cash to the investor’s account.
How does it work?
The process of trading cycle works according to below steps:
Depositories
The Indian share market’s two depositories, National Securities Depositories Limited (NSDL) & Central Depositories Services Limited (CDSL), are accountable for the dematerialized exchange of equities.
The needed stocks are made accessible via members’/custodians’ pool accounts with depository participants (brokers, banks, investment companies, and so on) as per the stocks’ pay-in time.
The depository then moves the stocks from the custodians’/members’ pool account to the account of the other party on the designated pay-out day.
Funds & Clearance
On the pay-in day, the client is notified digitally of his or her commitments about the fund transfer. He/she guarantees that the necessary money is in his/her account and ready to be paid to the appropriate firm.
The clearing agency subsequently sends the funds’ commitment file to the clearing bank, which debits the investor’s account and credits the clearing agency’s account.
After clearing the liabilities, the clearing agency proceeds to the next stage of settlement, crediting cash from its account to the firm ‘s account and stocks to the investor’s account.
Time Period of Trading Cycle
The Indian Stock Exchange uses a ‘T+2′ rolling settlement cycle. The ‘Deal Date,’ which is denoted by the letter ‘T,’ is the day the trade is conducted.
Every working day after the trade date is denoted by the letters T+1, T+2, and so on (weekends and stock exchange holidays not included).
In India, transactions are settled on a T+2 day. Securities and Exchange Board of India (SEBI) has now authorised T+1 Settlement on a temporary basis, according to a recent update.
Conclusion
The Process is quite simple and helps both parties do a trade with any issues. This might be faster in upcoming years.
This is all from our side regarding the Trading Cycle. Although, if you have any doubts about trade life cycle steps you can just comment below.
Other Interesting blogs related to Trading Cycle:
FAQ About Trade Life Cycle in Stock Market
Trading cycle in India?
In India's stock exchanges, the T+2 settlement cycle is used. This indicates that the entire trade life cycle, from beginning to settlement, took two days. However, SEBI has temporarily permitted several businesses to use the t1 Settlement cycle in a recent update.
Trade settlement cycle in India
In India's stock exchanges, the T+2 settlement cycle is used. This indicates that the entire trade life cycle, from beginning to settlement, took two days. However, SEBI has temporarily permitted several businesses to use the t1 Settlement cycle in a recent update.
Trading cycle meaning
The trading cycle is the way through which stocks in the Indian stock market are exchanged. It facilitates a smooth transaction among the investor and the firm.
Trading cycle in stock market?
The trading cycle is the way through which stocks in the Indian stock market are exchanged. In India's stock market, the T+2 settlement cycle is used. This indicates that the entire trade life cycle, from beginning to settlement, took two days.
What is trading cycle in finance?
The trading cycle is the way through which stocks in the Indian stock market are exchanged. In India's stock market, the T+2 settlement cycle is used. This indicates that the entire trade life cycle, from beginning to settlement, took two days.
