Top 7 Procedures for Dealing at Stock Exchange

This article throws light upon the top seven procedures for dealing at stock exchange. The procedures are: 1. Selection of a Broker 2. Placing an Order 3. Making the Contract 4. Contact Note 5. Settlement 6. Electronic Settlement of Trade 7. Rolling Settlement.

Procedure # 1. Selection of a Broker:

The first thing to be done is to select broker through whom the purchase or sale is to be made. The intending investor or seller may approach his bank for this purchase. The banks have appointed their own brokers at exchanges and they contact for dealings on behalf of their customers. On a recommendation from there bank the client’s account is opened by the broker. The bank assures the financial condition of the client.

Procedure # 2. Placing an Order:

After selecting the broker the client places an order for purchase or sale of securities. The broker also guides the client about the type of securities to be purchased and the proper time for it. If a client is to sell the securities then the broker tells him about the favourable time for sale. The broker is told to purchase shares, their number and price to be paid.

Sometimes a definite price is given on which the purchase is to be made, sometimes the tentative price is told, sometimes the maximum price to be paid is told, etc. The broker will try to make purchases as far as possible to the nearest price offered by the client. The broker is given some choice for bargaining. The same type of choice is given to the broker for selling the securities.

Procedure # 3. Making the Contract:

The trading floor of the stock exchange is divided into different parts known as trading posts. Different posts deal in different types of securities. The authorised clerk of the broker goes to the concerned post and expresses his intention to buy and sell the securities. A deal is struck when the other party also agrees.

The bargain is struck by an outcry mentioning the price and number of securities contracted by both the clerks. The bargain is noted by both the parties in their note books. The slip giving brief details of the bargain is put in a box for making announcement in the official price list for publicity.

Procedure # 4. Contact Note:

The buying and selling brokers prepare notes after their mutual consent next day. The seller is sent a selling note and the buyer is sent a buying note. The details of securities traded are given mentioning their number, price, etc.

Procedure # 5. Settlement:

The spot dealings are settled there in full. The selling broker hands over the transfer form and share certificates to the buying broker after receiving the price. The settlement for ready delivery and forward contracts is done with a different procedure.

(i) Settlement of Ready Delivery Contracts:

The settlement in different stock exchanges is done between 3 to 7 days of the transaction. If the settlement is done by giving actual delivery of securities on receiving the price, it is called liquidation in full. In another method the dealings are squared by adjusting price differences only.

(ii) Settlement of Forward Delivery Contracts:

The forward delivery contracts are done for speculative purposes. Only the active and broad market securities are traded in forward contracts. The settlement of forward contracts can be done in any of the three ways:

(a) Liquidation in Full:

The securities are delivered and payment is received or vice-versa after crossing all intermediate purchases and sales.

(b) Liquidation by Payment of Differences:

The purchases and sale are offset at the ruling price by paying or receiving the difference amount. The securities are not delivered but only the difference of prices contracted and current prices are received or paid as the case may be.

(c) Carry over to the Next Settlement:

When the buyer does not want to settle the contract but wants to carry it to a future date then it is called carry over. The buyer will have to pay certain amount to the seller for this concession and the amount paid is known as ‘Badla’ or ‘Contago charge’.

Procedure # 6. Electronic Settlement of Trade:

(i) Procedure for Selling Deinaterialised Securities:

The procedure for selling dematerialised securities in stock exchanges is similar to the procedure for selling physical securities. The only major difference is that instead of delivering physical securities to the broker, the investor instructs his depository participant (DP) to debit his demat account with the number of securities sold by him and credit the broker’s cleaning account.

The procedure for selling dematerialised securities is given below:

(a) Investors sell securities in any of the stock exchanges linked to depository through a broker.

(b) Investor instructs his DP to debit his demat account with the number of securities sold and credit the broker’s clearing account.

Before the pay-in day, broker of the investor transfers the securities to clearing corporation.

The broker receives payment from the stock exchange.

The investor receives payment from the broker for the sale of securities in the same manner as received in case of sale of physical securities.

(ii) Procedure for Purchasing Dematerialised Securities:

The procedure for purchasing dematerialised securities is also similar to the procedure for buying physical securities.

(a) Investor instructs DP to receive credits into his account in the prescribed form. There may be one time standing instruction or separate instruction each time to receive credits

(b) Investor purchases securities in any of stock exchanges linked to depository through a broker.

(c) Broker receives payment from investor and arranges payment to clearing corporation.

(d) Broker receives credit of securities in clearing account on the pay-out day.

(e) Broker gives instructions to DP to debit clearing account and credit client’s account.

(f) Investor receives shares into his account by way of book entry.

Procedure # 7. Rolling Settlement:

Rolling settlement is an important measure to enhance the efficiency and integrity of the security market. The shift from the traditional account period settlement marks an important change in the market design and age old practices. In January, 1998, SEBI had introduced rolling settlement on a voluntary basis on the stock exchanges for securities, which were eligible for dematerialised trading.

However, as there was hardly any response to the voluntary scheme, SEBI introduced compulsory rolling settlement initially for 10 scrips in January 2000 and then increased the number of scrips in a phased manner to 163 by May 2000 and further to 414 scrips from July 2, 2001.

Rolling settlement has been introduced in the form of T + 5 settlement systems where T is the trade date and 5 days are given for delivery of securities and cash payments.

In other words, T+5 means delivery and payment will be made five working days later. If trading takes place on Monday to buy 300 shares, it will be settled on Sunday when payment will be made and delivery of shares received. This cycle would be rolling and hence there would be number of set of transactions for delivery every day.

As each day’s transactions are settled in full, rolling settlement helps in increasing the liquidity in the market, w.e.f. January 2, 2002 all scrips have been brought under compulsory rolling mode.

The following are the advantages of rolling settlement:

(i) Rolling settlement system eliminates any scope for speculation and arbitrage.

(ii) RS system is simple to understand as compared to badla system. It is more transparent and regulated. The chances of fraud are very less. The investor has to remember the day of purchase or sale.

(iii) RS reduces the period of settlement of transactions.

(iv) There is no risk of fluctuations of prices.

(v) RS ensures standardised settlement (i.e. T+5) processes, thus the participants can pay attention to other market factors.

(vi) Retail investors are at more advantageous position because RS shoretens the delays for converting securities into cash.

The success of rolling system depends upon depository, margin trading, strong banking system with electronic fund transfer facility and continuous net settlement of transactions. Stock market moved from T+5 to the T+2 systems from April 1, 2003 and further moved to T+1 system. Thus, at present, delivery and payments are made one day after the date of trading.