Trading Procedure on a Stock Exchange

A market that serves as a link between the savers and borrowers by transferring the capital
or money from those who have a surplus amount of money to those who are in need of
money or investment is known as Financial Market. Simply put, Financial Market is a market
that creates and exchanges financial assets. In general, the investors are known as the
surplus units and business enterprises are known as the deficit units. Hence, a financial
market acts as a link between surplus units and deficit units, and brings the borrowers and
lenders together.
Stock Exchange
The Securities Contract and Regulation Act defines a stock exchange as, “An organisation or
body of individuals, whether incorporated or not established for the purpose of assisting,
regulating, and controlling of business in buying, selling, and dealing in securities.”
Trading Procedure on a Stock Exchange

Before the companies start selling the securities through the stock exchange, they have to
first get their securities listed on the stock exchange. The name of the company is included in
listed securities only when the authorities of the stock exchange are satisfied with the
financial soundness and various other aspects of the company.

Earlier, the buying and selling of securities were done on the trading floor of the stock
exchange. However, in present times, it is done through computers and consists of the
following steps:

1. Selection of Broker
One can buy and sell securities only through the brokers registered under SEBI and who are
members of the stock exchange. A broker can be a partnership firm, an individual, or a
corporate body. Hence, the first step of the trading procedure is the selection of a broker
who will buy/sell securities on the behalf of a speculator or investor. Before placing an order
to the registered broker, the investor has to provide some information, including PAN
Number, Date of Birth and Address, Educational Qualification and Occupation, Residential
Status (Indian/NRI), Bank Account Details, Depository A/c details, Name of any other brokers
with whom they have registered, and Client code number in the client registration form.
After getting information regarding all the said things, the broker opens a trading account in
the name of the investor.
2. Opening Demat Account with Depository
An account that must be opened with the Depository Participant (including stock brokers or
banks) by an Indian citizen for trading in the listed securities in electronic form is known as
Demat (Dematerialised) Account or Beneficial Owner (BO) Account.

The second step of the trading procedure is the opening of a Demat Account. The
Depository holds the securities in electronic form. A Depository is an organisation or
institution, which holds securities like bonds, shares, debentures, etc. At present there are
two Depositories; namely, NSDL (National Securities Depository Ltd.) and CDSL (Central
Depository Securities Ltd.). The Depository and the investor do not have direct contact with
each other and interact with each other through Depository Participants only. The
Depository Participant will have to maintain the securities account balances of the investor
and intimate investor from time to time about the status of their holdings.
3. Placing the Order
The next step after the opening of a Demat Account is the placing of an order by the
investor. The investor can place the order to the broker either personally or through email,
phone, etc. The investor must make sure that the order placed clearly specifies the range or
price at which the securities can be sold or bought. For example, an order placed by Kashish
is, “Buy 200 equity shares of Nestle for no more than ₹200 per share.”
4. Match the Share and Best Price
The broker after receiving an order from the investor will have to then go online and connect
to the main stock exchange to match the share and best price available.
5. Executing Order
When the shares can be bought or sold at the price mentioned by the investor, it will be
communicated to the broker terminal, and then the order will be executed electronically.
Once the order has been executed, the broker will issue a trade confirmation slip to the
investors.
6. Issue of Contract Note
Once the trade has been executed within 24 hours, the broker will issue a contract note. A
contract note consists of the details of the number of shares bought or sold, the date, time
of the deal, price of securities, and brokerage charges. A contract note is an essential legal
document. It helps in settling disputes claims between the investors and the brokers. A
contract note also consists of a printed unique order code number assigned to each
transaction by the Stock Exchange.
7. Delivery of Share and making Payment
In the next step, the investor has to deliver the shares sold or has to pay cash for the shares
bought. The investor has to do so immediately after receiving the contract note or before
the day when the broker shall make delivery of shares to the exchange or make payment.
This is known as Pay in Day.
8. Settlement Cycle
The payment of securities in cash or delivery of securities is done on Pay in Day, which is
before T+2 Day. It is because the settlement cycle is T+2 days on w.e.f April 2003 rolling
settlement basis. For example, if the transaction took place on Tuesday, then the payment
must be done before Thursday, i.e., T+2 days (Transaction plus two more days).
9. Delivery of Shares or Making Payment
On the T+2 Day, the Stock Exchange will then deliver the share or make payment to the
other broker. This is known as Pay out Day. Once the shares have been delivered of payment
has been made, the broker has to make payment to the investor within 24 hours of the pay-
out day, as he/she has already received payment from the exchange.
10. Delivery of Shares in Demat Form
The last step of the trading procedure is making delivery or shares in Demat form by the
broker directly to the Demat Account of the investor. The investor is obligated to give details
of his Demat Account and instruct his Depository Participant (DP) for taking delivery of
securities directly in his beneficial owner account.