Electronic trading is the online trading facility that the stock market offers to investors. You can check the details of shares online and place an order to buy or sell them through the Demat & Trading account. Without stepping out of your home, you can gain from numerous opportunities in the market. Behind the scenes, online trading is a complex process backed by technology and involves various steps that are completed electronically. Earlier, stock trading was a hectic process associated with ground-based stock exchanges following the outcry trading system. Individuals had to be present at the stock exchange to place an order for securities.
Let us elaborate further on the stock market and the different steps of the online trading process.
● Setting Up Required Accounts for Online Trading
The electronic trading system involves setting up a Demat and trading account for investors. This account facilitates the electronic transfer of securities between buyers and sellers and helps with fund transfers between your bank and the trading account.
Stockbrokers are the authorized intermediaries registered with SEBI, and the stock exchange to provide the facility of online trading.
Demat Account Meaning: A Demat account helps in the online storage of financial assets. Every security you buy in the stock market is held in your Demat account electronically.
- Demat Account helps maintain a digital record of your financial securities.
- You can store multiple securities in your Demat account, like shares, mutual funds, Bonds, ETF (Exchange Traded Funds), etc.
- Since shares are stored digitally, there is no risk of shares getting misplaced, tampered with, or stolen.
- Shares can be transferred from one Demat account to another digitally without involving any paperwork.
Trading Account Meaning: A trading account is required to access the stock exchange where one can buy and sell shares. You can approach multiple stock exchanges through the broker’s trading platform. It is a necessary account as no investor can approach a stock exchange operating online directly. It is linked to your bank account.
- A trading account gives you a record of transactions you make of buying or selling financial securities in the stock market.
- It ensures secure and smooth trading transactions.
Intraday trading based on online trading accounts is more effective in the electronic trading system as traders can automate various trading processes like square-off positions with the help of bracket order, cover order and stop-loss.
● Trade Order Execution
Whenever you buy or sell securities on the stock exchange, your broker forwards these trades to the stock exchange, and the exchange executes the order. It matches the trade order and searches for a buyer/seller looking to trade the same security in the same quantity at the same point in time.
- Once it finds the trades per the buyer and seller requirements, the order gets executed electronically on the exchange.
- Then the clearing corporation of the exchange settles the transactions in the buyer and seller account.
● Clearing and Settlement Process
In the stock market, transactions between traders get settled on a “T+ days” basis. It ensures a smooth transfer of funds and securities from the seller to the buyer.
A clearinghouse (or Clearing Corporation) is an important part of the online trading system. The “clearing” in stock trading refers to the adjustment in the accounts of parties. The buyer’s trading account gets debited, and the seller’s trading account gets credited.
The “settlement” process ensures the actual exchange of securities and funds. Generally, exchanges follow the “T+2” days settlement process. The Exchange intends to move towards a “T+1” day settlement that it will accomplish in phases. “T” refers to the transaction day when a buyer places an order to trade a security.
Explanation of T+2 Days Settlement
Let us understand this settlement process.
- Day 1 (T day): The broker deducts the transaction amount from the buyer’s linked bank account and credits it to the clearinghouse account on the transaction day. This deduction includes brokerage charges, transaction fees, and other charges. The broker blocks the traded securities in the seller’s Demat account and credits the shares in the clearinghouse account.
- Day 2 (T+1 day): The clearing house transfers the securities and funds to the stockbroker and not to the trade participants. The transaction is not completed on this day by the stockbroker.
- Day 3 (T+2 day): The final day for trade settlement. Securities and funds are transferred to the buyer’s Demat account and seller’s bank account, respectively.
After crediting the shares and funds in the respective accounts of the buyer and seller, a trade gets completed.
This way, the stock market has changed its working system altogether, as explained above, using advanced technology. In the technological framework, you can conveniently trade online by logging into your Demat and trading account.
Investments in the securities market are subject to market risk, read all the related documents carefully before investing.