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Equity Buying and Selling Procedure
Buying and Selling Procedure Back
 
A person desirous of buying/selling shares in the market has to first place his order with a broker. When the buy/sell order of the shares is communicated to the broker he routes the order through his system to the exchange. The order stays in the queue exchange's systems and gets executed when the order logs on to the system within buy/sell limit that has been specified. The shares purchased/sold will be sent to the purchaser by the broker either in physical or demat format.
 
For Example: You want to buy 100 shares of Reliance Industries Ltd currently trading at Rs 1290. You will place an order with your broker telling him that you want to purchase 100 shares. You will also have to tell him the price at which you want to purchase. This price could be 1290, 1285 or 1295 or any other number or you can give a range between which you would be comfortable buying. Will have discussed different types of orders one can place in the following section. Once the order is placed with the broker, he places an order with the exchange through his system. The exchange, through its electronic system, will find the best suitable party that is willing to sell 100 shares of Reliance within your price criteria. Once the order is executed your broker gets a confirmation and will inform you of the same. The broker will charge a fee for provide this service.
 
TYPES OF ORDERS
There are various types of orders, which can be placed on the exchanges:
 
Limit Order: The order refers to a buy or sell order with a limit price. Suppose, you check the quote of Tata Motors Ltd (TATAMOTORS) as Rs. 946 (Ask). You place a buy order for TATAMOTORS with a limit price of Rs 945. This puts a cap on your purchase price. In this case as the current price is greater than your limit price, order will remain pending and will be executed as soon as the price falls to Rs. 945 or below. In case the actual price of TATAMOTORS on the exchange was Rs 942, your order will be executed at the best price offered on the exchange, say Rs 943. Thus you may get an execution below your limit price but in no case will exceed the limit buy price. Similarly for a limit sell order in no case the execution price will be below the limit sell price.
 
Market Order: Generally a market order is used by investors, who expect the price of share to move sharply and are yet keen on buying and selling the share regardless of price. Suppose, the last quote of TATAMOTORS is Rs 946 and you place a market buy order. The execution will be at the best offer price on the exchange, which could be above Rs 946 or below Rs 946. The risk is that the execution price could be substantially different from the last quote you saw.
 
Stop Loss Order: A stop loss order allows the trading member to place an order which gets activated only when the last traded price (LTP) of the Share is reached or crosses a threshold price called as the trigger price. The trigger price will be as on the price mark that you want it to be. For example, you have a sold position in TATAMOTORS booked at Rs. 946. Later in case the market goes against you i.e. go up, you would not like to buy the scrip for more than Rs.950. Then you would put a SL Buy order with a Limit Price of Rs.950. You may choose to give a trigger price of Rs.946 in which case the order will get triggered into the market when the last traded price hits Rs.946 or above. The execution will then be immediate and will be at the best price between 946 and 950.
 
SETTLEMENT
In a rolling settlement, each trading day is considered as a trading period and trades executed during the day are settled based on the net obligations for the day. At NSE and BSE, trades in rolling settlement are settled on a T+2 basis i.e. on the 2nd working day. For arriving at the settlement day all intervening holidays, which include bank holidays, NSE/BSE holidays, Saturdays and Sundays are excluded. Typically trades taking place on Monday are settled on Wednesday, Tuesday's trades settled on Thursday and so on.
 
CLEARING
A so-called "back office" functions in the securities trade that involves physical delivery of securities and money payments between buyers and sellers. Stock Exchanges have established an efficient, automated stock clearing system which, through its various subsidiaries, provides depository, delivery, and computerized bookkeeping entries that have greatly reduced the physical movement of stock and money between members.
 
BUYING LIMITS
Suppose you have sold some shares on NSE and are trying to figure out that if you can use the money to buy shares on NSE in a different settlement cycle or say on BSE. Buying Limit simply tells the customer what is his limit for a given settlement for the desired exchange. Assume that you have enrolled for a trading account, which requires 100% of the money required to fund the purchase, be available. Suppose you have Rs 1,00,000 in your Bank A/C and you set aside Rs 50,000 for which you would like to make some purchase. Your Buying Limit is Rs 50,000. Assume that you sell shares worth Rs 1,00,000 on the NSE on Monday. The BL therefore for the NSE at that point of time goes upto Rs 1,50,000. This means you can buy shares upto Rs 1,50,000 on NSE or BSE. If you buy shares worth Rs 75,000 on Tuesday on NSE your BL will naturally reduce to Rs 75,000. Hence your BL is simply the amount set aside by you from your bank account and the amount realized from the sale of any shares you have made less any purchases you have made.
 
Your BL of Rs 50,000, which is the amount set aside by you from your Bank account for purchase is available for BSE and NSE. As you have made the sale of shares on NSE for Rs.100000, the BL for NSE & BSE rises to 1,50,000. The amount from sale of shares in NSE will also be available for purchase on BSE.
 
DEMATERIALIZATION
Dematerialization in short called as ‘demat’ is the process by which an investor can get physical certificates converted into electronic form maintained in an account with the Depository Participant. The investors can dematerialize share certificates that are already registered in their name and belong to the list of securities admitted for dematerialization at the depositories.
 
Depository: The organization responsible to maintain investor's securities in the electronic form is called the depository. In other words, a depository can therefore be conceived of as a "Bank" for securities. In India there are two such organizations viz. NSDL and CDSL. The depository concept is similar to the Banking system with the exception that banks handle funds whereas a depository handles securities of the investors. An investor wishing to utilize the services offered by a depository has to open an account with the depository through a Depository Participant.
 
Depository Participant: The market intermediary through whom the depository services can be availed by the investors is called a Depository Participant (DP). As per SEBI regulations, DP could be organizations involved in the business of providing financial services like banks, brokers, custodians and financial institutions. This system of using the existing distribution channel (mainly constituting DPs) helps the depository to reach a wide cross section of investors spread across a large geographical area at a minimum cost. The admission of the DPs involve a detailed evaluation by the depository of their capability to meet with the strict service standards and a further evaluation and approval from SEBI. Realizing the potential, all the custodians in India and a number of banks, financial institutions and major brokers have already joined as DPs to provide services in a number of cities.
 
DEPOSITORY SERVICES
Trading in demat segment completely eliminates the risk of bad deliveries. In case of transfer of electronic shares, you save 0.5% in stamp duty. Avoids the cost of courier/ notarization/ the need for further follow-up with your broker for shares returned for company objection No loss of certificates in transit and saves substantial expenses involved in obtaining duplicate certificates, when the original share certificates become mutilated or misplaced. Increasing liquidity of securities due to immediate transfer & registration reduction in brokerage for trading in dematerialized shares receive bonuses and rights into the depository account as a direct credit, thus eliminating risk of loss in transit. Lower interest charge for loans taken against demat shares as compared to the interest for loan against physical shares. RBI has increased the limit of loans availed against dematerialized securities as collateral to Rs 20 lakh per borrower as against Rs 10 lakh per borrower in case of loans against physical securities. RBI has also reduced the minimum margin to 25% for loans against dematerialized securities, as against 50% for loans against physical securities. Fill up the account opening form, which is available with the DP. Sign the DP-client agreement, which defines the rights and duties of the DP and the person wishing to open the account. Receive your client account number (client ID). This client id along with your DP id gives you a unique identification in the depository system. Fill up a dematerialization request form, which is available with your DP. Submit your share certificates along with the form; (write "surrendered for demat" on the face of the certificate before submitting it for demat) Receive credit for the dematerialized shares into your account within 15 days.
 
HOW TO OPEN A DEMAT ACCOUNT
Opening a depository account is as simple as opening a bank account. You can open a depository account with any DP convenient to you by following these steps:
  1. Fill up the account opening form, which is available with the DP. Sign the DP-client agreement, which defines the rights and duties of the DP and the person wishing to open the account. Receive your client account number (client ID). This client id along with your DP id gives you a unique identification in the depository system.
  2. There is no restriction on the number of depository accounts you can open. However, if your existing physical shares are in joint names, be sure to open the account in the same order of names before you submit your share certificates for demat.
HOW TO DEMATERIALIZE YOUR SHARE CERTIFICATES
Fill up a dematerialization request form, which is available with your DP. Submit your share certificates along with the form; (write "surrendered for demat" on the face of the certificate before submitting it for demat) Receive credit for the dematerialized shares into your account within 15 days.
 
In case of directly purchasing dematerialized shares from the broker, instruct your broker to purchase the dematerialized shares from the stock exchanges linked to the depositories. Once the order is executed, you have to instruct your DP to receive securities from your broker's clearing account. You have to ensure that your broker also gives a matching instruction to his DP to transfer the shares purchased on your behalf into your depository account.
MARGIN TRADING
Normally to buy and sell shares, you need to have the money to pay for your purchase of shares in your demat accounts to deliver for your sale. In case you want to trade intraday you can trade by depositing margin with your broker. Basically, the broker will lend you money during the day with the condition that you have certain percentage of your own funds riding on the stock you trade during the day. If during the course of the settlement cycle the market moves in your favor (risen in case of purchase done earlier and fallen in case of a sale done earlier) you will make a profit and you receive the payment from the exchange. In case the price movement is adverse, you will make a loss and you will have to make the payment to the exchange. Margins are thus collected to safeguard against any adverse price movement. Margins are quoted as a percentage of the value of the transaction.
CIRCUIT FILTERS AND TRADING BRANDS
In order to check the volatility of shares, SEBI has come with a set of rules to determine the fixed price bands for different securities within which they can move in a day. As per Sebi directive, all securities traded at or above Rs.10/- and below Rs.20/- have a daily price band of ±25%. All securities traded below Rs. 10/- have a daily price band of ± 50%. Price band for all securities traded at or above Rs. 20/- has a daily price band of ± 8%. However, the now the price bands have been relaxed to ± 8% ± 8% for select 100 scrips after a cooling period of half an hour. The previous day's closing price is taken as the base price for calculating the price. As the closing price on BSE and NSE can be significantly different, this means that the circuit limit for a share on BSE and NSE can be different.
SECURITIES LENDING
Securities lending program is from the NSE. Meaning this is a where in a holder of securities or their agent lends eligible securities to borrowers in return for a fee to cover short positions.
INSIDER TRADING
Insider trading is illegal in India. When information, which is sensitive in the form of influencing the price of a scrip, is procured or/and used from sources other than the normal course of information output for unscrupulous inducement of volatility or personal profits, it is called as Insider trading. Insider trading refers to transactions in securities of some company executed by a company insider. Although an insider might theoretically be anyone who knows material financial information about the company before it becomes public, in practice, the list of company insiders is normally restricted to a moderate-sized list of company officers and other senior executives. Most companies warn employees about insider trading. SEBI has strict rules in place that dictates when company insiders may execute transactions in their company's securities. All transactions that do not conform to these rules are, in general, prosecutable offenses under the relevant law.

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