While understanding “trade settlement meaning in stock market” is not directly related to trading strategies or trading setups , but as an investor/trader this concept will clarify few things . We will discuss this concept considering equity trades where you buy and sell stock on cash delivery basis. Also we will not get into too much details like how transactions happens and which all parties are involved like broker / clearing members and corporations etc. We will keep it simple and relevant so that as a retail trader we know what T+1 settlement cycle means and how shortening of cycle will impact us. So after you read this article , you will have better understanding of :
a) If you buy or sell a stock , when it is delivered to your account ( Money/Stocks) ?
b) What is T+1 , T+2 settlement meaning in stock market ?
T+1 Settlement meaning in Stock market
First lets understand what is “T” and “1” in T+1 system
T = Trading day when order is executed
1 = 1 consecutive working day
Hence , T+1 settlement cycle means that if you buy a stock say on Wednesday ( Day “T”) , you will get the delivery of the stock next day which is Thursday ( Day “T+1”). When there was T+2 settlement cycle , if you buy a stock on Wednesday ( Day “T”) , the delivery was completed on Friday ( Day “T+2”).
*Note: In T+1 , the number 1 should be a working day . So in the above example if you buy a stock on Wednesday ( Day “T”) and next day is holiday , the settlement will be done on Friday.
Why SEBI has moved to shorter settlement cycle
As we have moved from T+2 to T+1settlement , this improves the efficiency and utilization of capital in the markets. It enables faster transfer of shares and money between buyers and sellers who are involved in the trade.
Lets see some examples:
Example 1
Suppose you have borrowed capital from someone to invest in stock markets . The capital was borrowed at 0.5% daily interest ( Assuming for this example ) . If a trader gets all money in T+1 days ( Suppose he has sold the stock ) , then he can return that money back and save 1 day interest. 0.5% is a big amount if we consider large capital. This all has become possible because of technological advancement which is enabling shorter settlement cycle.
Example 2
You are a retail investor and you sold one stock . If you want to buy other stock on the same day or next day , your capital will be blocked if the settlement is T+2 days. With T+1 settlement , you will get the margin in you account on next day which can be utilized to take some different stock.
Benefits of shorter settlement cycle
- Quick pay in and pay out for traders and investors
- Capital efficiency increase liquidity in the market and it might increase market participants as more people will trade .
T+0 ( Day/Hour ) or instantaneous settlement ?
In T+0 cycle , buyer will get the shares on the same day in his/her demat account and at the same time sellers will get the money in their trading account on the same day.
This settlement cycle will help unlock the margins for investors ( Otherwise it will get locked due to settlement cycle ) and hence they can utilize the fund better and faster to invest in market again.
It can also increase the number of trades as investors will invest the money once they get margin in their account on the same day.
I hope you have understood the concept and meaning of settlement cycle . We will keep discussing stock market terms in simplified format so that a retail trader have more understanding of the same which will help in making money and take informed decisions.
Different sections which you can Explore
- Trading Strategies – Intraday and Swing
- Candlesticks – Bullish and Bearish pattern
- Terms used in stock markets