When you buy or sell stocks, the process involves multiple steps to ensure the smooth transfer of shares and funds between buyers and sellers. This mechanism is called clearing and settlement, and it’s crucial for every investor to understand how it works.
In this blog, we’ll break down:
✔ What happens when you buy a stock?
✔ What happens when you sell a stock?
✔ What is T+1 settlement?
✔ What is Earmarking?
Let’s dive in!
10.1 – Market Structure: Clearing & Settlement
The clearing and settlement process ensures that when you buy a stock, the shares are credited to your Demat account, and when you sell, the money is deposited into your trading account.
Why is this important?
- Helps you track when shares/money will reflect in your account.
- Avoids confusion about trade execution.
- Ensures transparency in transactions.
10.2 – What Happens When You Buy a Stock?
Day 1 – Trade Day (T Day) – Monday
- You buy 100 shares of Reliance at ₹1,000/share (Total: ₹1,00,000).
- The broker checks if you have sufficient funds (₹1,00,000 + charges).
- Charges Applicable:
- Brokerage: ₹0 (for delivery trades).
- STT (Securities Transaction Tax): 0.1% (₹100).
- Exchange Charges: 0.00345% (₹3.45).
- GST: 18% on brokerage + transaction charges (₹0.62).
- SEBI Charges: ₹0.12.
- Stamp Duty: 0.015% (₹15).
- Total Charges: ₹119.19.
- Contract Note is generated and emailed to you (contains trade details).
- Funds are blocked, but shares are not yet credited to your Demat.
Day 2 – T+1 Day (Tuesday) – Settlement
- India follows T+1 settlement (since Jan 2023).
- Shares are credited to your Demat account by the end of T+1 day.
- Earlier, it was T+2 (shares credited on Wednesday).
10.3 – What Happens When You Sell a Stock?
Day 1 – Trade Day (T Day) – Monday
- You sell 100 shares of Reliance at ₹1,050/share (Total: ₹1,05,000).
- Shares are blocked in your Demat account.
- 80% of funds (₹84,000) are credited immediately to your trading account.
- The remaining 20% (₹21,000) is credited on T+1 day.
Day 2 – T+1 Day (Tuesday) – Settlement
- Shares are debited from your Demat account.
- Full sale proceeds (after charges) are credited to your account.
10.4 – What is Earmarking?
Earlier, when you sold shares:
- The broker would debit shares from your Demat and hold them in their pool account until T+2.
- This created a risk of misuse by brokers.
New Earmarking System (Since Nov 2022)
- Shares are not debited but “earmarked” (temporarily locked).
- On T+1, shares move directly to the clearing corporation.
- No broker interference – reduces risk of misuse.
FAQs
Q1. Can I sell shares bought on T day on T+1?
Yes, but ensure they are eligible for BTST (Before T+1 Selling).
Q2. What if I don’t have funds to buy shares?
The broker will reject the order if funds are insufficient.
Q3. Why is T+1 better than T+2?
Faster settlement reduces risk and improves liquidity.
Q4. What happens if I sell shares but don’t deliver them?
The broker may auction them, and you may face penalties.