Have you ever bought something online and eagerly awaited its arrival, only to find out delivery takes several days? The stock market can be similar – you buy shares, but there’s a waiting period before you officially “own” them. This waiting period is known as settlement and in India, it follows a system called rolling settlement.
Imagine Buying Shares Like Ordering Pizza:
Think of buying shares like ordering your favorite pizza. You place the order (execute the trade), but there’s a delivery time before you can actually enjoy it (settlement). In a perfect world, the pizza would arrive instantly, but there are logistical steps involved.
What is Rolling Settlement?
Rolling settlement is a system where the settlement of trades happens on a predetermined series of days, following the trade date. Unlike account settlement, where all trades settle on a specific day, rolling settlement offers a more continuous flow. Here’s the breakdown:
- T+2: This is the most common rolling settlement cycle in India. “T” refers to the trade date, and “+2” signifies that the settlement occurs two business days after the trade execution. So, if you buy shares on Monday, they’ll be credited to your Demat account by Wednesday.
Benefits of Rolling Settlement:
- Faster access to funds and securities: Compared to account settlement, rolling settlement allows you to access your funds and securities quicker after a trade.
- Reduced settlement risk: By shortening the settlement period, rolling settlement minimizes the risk of defaults or counterparty failures.
- Increased market liquidity: Faster settlement facilitates smoother movement of funds and securities, potentially improving market liquidity.
Things to Keep in Mind:
- Trading holidays: Settlement days don’t include weekends or exchange holidays. So, if you buy shares on a Friday before a holiday, settlement might occur on the following Tuesday.
- Intraday trading: Rolling settlement doesn’t significantly impact intraday traders who buy and sell within the same day.
- Delivery instructions: If you plan to take physical delivery of shares (rare in the digital age), you’ll need to specify delivery instructions beforehand.
Understanding rolling settlement is an essential step towards becoming a confident stock market investor. Now you know, when you buy shares, it’s not like instant pizza delivery, but a slightly more patient wait for your investment to officially arrive!