When you place an order on your broker’s trading platform, your transaction is completed within seconds and the shares are debited/credited accordingly. But ever thought about what happens on the back end?
Here is the process of how the transaction is completed, explained in simple words.
There are 5 steps that occur during a transaction:
- Placing an order
- Broker sends order to Stock Exchange
- Order Confirmation by the Stock Exchange
- Settlement of Shares
1) Placing an order
When an investor wants to buy a share of a listed company, he logs in to his broker’s website. From there, he places the order at the market price or at the limit price.
2) Broker sends order to the Stock Exchange
On receiving the request by the client, the broker sends the order to stock exchange for the trade.
3) Order confirmation by the Stock Exchange
The stock exchange matches the trade of the investor through price discovery method. Price discovery is the process of determining the price of a security by identifying the demand and supply in market of that security. For eg, if a market order is placed, the stock exchange will execute the trade at the next available price at which the security is being sold by another investor.
Once the order is confirmed, clearing takes place. Clearing is the process in which an entity checks the availability of funds and records the transactions. Basically, the clearing entity acts as a middle man to ensure smooth transfer of funds from the investor to the depository.
Settlement is the final stage in completion of an order where the shares are delivered into the demat account and the funds have been recieved by the seller. Once settlement is done, the shares are shown in the holding section of the investor’s demat account. The process of clearing and settlement takes T+2 business working days in India. T here denotes trading day. So, if a order is placed on Monday, the investor would get the delivery of shares on Wednesday.
So this is how transaction of shares takes and orders are completed. If you have any doubt related to this article, please ask down in the comment section.
Finance graduate with a strong desire to understand the complexities of financial markets. I make financial judgments for my investments based on the information I gained during my academic education. I write articles about financial literacy for dstreetanalyser.com in order to promote financial literacy among the general public.