Derivatives Trading Basics
by 5paisa Research Team Last Updated: 2022-06-15T18:11:08+05:30

Introduction

Investments are made to yield profit or generate cash flows. There are various kinds of investments depending on the risk one is willing to take on. However, not all of these yield returns at the same time. Most of them have time frames for their returns. Different investment types have different procedures to be followed for their settlement and also vary in time. This blog will look at the various settlement procedure based on the investment type.

Define Settlement Procedure

In the financial market, settlement is the process of delivering and transferring securities from one account to another. This process involves the buyer, the seller, and the custodian. The responsibilities of the custodian include:

a) Receiving securities from the buyer.
b) Sending securities to the seller.
c) Distributing the funds to the buyer and the seller.

The settlement must be in cash and can also be done through a "set-aside" arrangement. There are different types of settlement processes: the traditional settlement and the net settlement. The traditional settlement involves settlement with the delivery of securities and payment on trade date. The net settlement involves cash settlement and settlement with the delivery of securities.

What Are the Different Types of Settlements in the Stock Market?

Cash settlement is the type of settlement that occurs when a trader is trying to sell stock that they don't have. There are four main types of settlements in the stock market. They are as follows: cash settlement, net settlement, gross settlement, and delivery versus payment (DVP). 

Net settlement is the settlement process that occurs when a trader is trying to sell a stock, and they do have it. Gross settlement occurs when a trader is trying to sell a stock, and they do not have it. DVP settlement is the process of receiving stock that you have sold. It's a way of getting the cash and the stock at the same time. Even though DVP settlement is commonly used, it takes nearly a month for the settlement to process.

What Is Rolling Settlement?

Rolling settlement is when a trader is able to enter a trade before the futures contract settles. This is very common for futures contracts that are highly traded, like soybeans and corn. Since the price is constantly fluctuating, traders are able to see the new price and adjust their trades accordingly. This is different from the traditional futures contract, where the trader waits until the end of the month to see the outcome.

What Are the Rules of Settlement in BSE and NSE?

Settlement is the moment at which the buyer and supplier of stock exchange a stock for payment and the ownership of the shares. In the case of the National Stock Exchange (NSE), settlement is at the end of the trading day. In the case of the Bombay Stock Exchange (BSE), settlement is the end of the business day.

Conclusion

The Indian stock market is one of the most popular in the world. It has become easier for anyone to trade stocks in the last decade. The internet has provided investors with easy access to information and a wide range of investment opportunities. In this blog, we tried our best to cover the details of the Indian stock market trading and settlement process. We hope you found it useful. If you have further questions, comments, or concerns, do mention them in the comments section. We will try our best to answer them at the earliest.

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