Trading Procedure on a Stock Exchange

Buying and selling of securities in the secondary market is possible only if companies securities are registered with the stock exchange (s). At present, Indian capital market uses computers and internet for the smooth functioning of stock market transactions and involves following steps –

Trading Procedure on a Stock Exchange

(1) Selection of a broker – Trading in the stock is possible only through the stock broker who needs to be registered with the SEBI. At present many individuals and corporate bodies are providing brokerage facilities. First of all, traders have to select brokers who can place orders on their behalf in the stock market.

(2) Opening Accounts – Every trader dealing in the stock market requires three types of accounts which are as follows –

• Saving Account – An account which is used to keep money and is opened through banks.
• Trading Account – An account which is used for buying or selling of financial instruments. This account is opened with the broker.
• Dematerialised Account – An account which is used for keeping financial instruments in an electronic form. This account is opened with the depository participant through broker and all the transactions of this account are monitored by an organisation called depository.

(3) Fund Transfer – Traders who like to transact in the stock market have to transfer money from their saving account to trading account. Transfer of money from trading to saving can be done either by issuing cheque or through electronic fund transfer. Trading account having zero balance does not allow traders to buy shares in the stock market.

(4) Placing Order – After transferring money in the trading account, traders place their buying order through their brokers by stating the following information –

• Name of the share,
• Quantity to be purchased
• Buying price ( willing to pay )
• Trading / Demat account no.

(5) Settlement – Just after the successful execution of an order, delivery of financial instruments by the seller and payment for them by the buyer is made. In other words, trading account gets debited with money and demat account gets credited with financial instruments. It is stock exchange ‘ s responsibility to settle the accounts of the parties involved in the trading ( i. e. buyers and sellers ). Stock exchange ( s ) performs this task by following the “ T + 2 ” ( Trading day + two days ) settlement mechanism i. e. if a person buys shares on Monday then he gets the delivery of the same shares on Wednesday.