Any purchase of shares through a stock exchange needs to be routed through brokers registered with the exchange. Hence, for buying and selling shares on a regular basis, you need to register with a broker. This can be done by approaching a broker and signing up a client agreement form. It is also essential for a person to open a demat account through which securities are delivered and received. This demat account can be opened with a depository participant which again is a Sebi-registered intermediary. A broker asks his client to deposit money with them and then buys shares for you. The shares you buy from the broker will be transferred to your demat account after which you own the shares. Similarly, when a person sells shares, he has to transfer shares to the broker's account through his demat account.

What is a settlement cycle?

Whatever shares you buy, you need to get delivery of those shares. While if you sell shares, you need to get payment or cash for the same. The time taken to conclude both legs of the transaction is called a settlement cycle.

In India, stock exchanges follow a T+2 days settlement cycle. Trading of securities happen on the first day while the settlement of the same happens in two working days after that. This means that a security bought on Monday will be received by the client earliest on Wednesday, which is called a payout day by the exchange. If a person has bought security, he is supposed to pay money to the broker before paying on deadline, which is two days after the trading day, but the second day is considered till 10:30 a.m.

How does a broker identify which shares are to be transferred to his client?

Brokers identify their clients by a unique code assigned to a client. After the transaction is done by a client, the broker issues him a contract note which provides details of transaction such as time and date of the trade. Apart from the purchase price of security, a client is also supposed to pay brokerage, stamp duty and securities transaction tax. In case of a sale transaction, these costs are reduced from the sale proceeds and then the remaining amount is paid to the client.

Who is responsible for settlement of trades?

Settlement of securities is done by the clearing corporation of the exchange. Settlement of funds is done by a panel of banks registered with the exchange. Clearing corporation identifies payable/receivable position of brokers based on which the obligation report for brokers is created. On T+2 days, all the brokers who have transacted two days before receive or give shares to the clearing corporation of exchange. This is an automated process undertaken by the depository which is either the NSDL and CDSL.

Is my trade guaranteed by the exchange?

If you deal through a stock exchange, this risk is reduced due to trade/settlement guarantee offered by the stock exchange mechanism. Further, you also have certain protections against defaults by your broker.

How many times can one buy and sell within a settlement cycle?