The Complete Trading Cycle

During a trading process an investor buys the shares and sells the shares and after the trade execution the buyer and the seller receives the shares and funds respectively. This is what the process in stock exchange looks like. But in reality there is much more complex process that goes on at the back end. The transactions in secondary market pass through three distinct phases, viz., trading, clearing and settlement. While the stock exchanges provide the platform for trading, the clearing corporation determines the funds and securities obligations of the trading members and ensures that the trade is settled through exchanges of obligations. The clearing banks and the depositories provide the necessary interface between the custodians/clearing members for settlement of funds and securities obligations of trading members. The clearing process involves determination of what counter-parties owe, and which counter-parties are due to receive on the settlement date, thereafter the obligations are discharged by settlement.

The System applicable in India today is Rolling Settlement. One of the greatest achievements of the current system is settlement of trades within three working days, i.e. T+2 rolling settlement which has replaced account period settlement, which used to take at least a week. days later. This is called ‘T+X’ rolling settlement, where ‘T’ is the trade date and ‘X’ is the number of business days after trade date on which settlement takes place. The rolling settlement prevailing in India is T+2, implying that the outstanding positions at the end of the day ‘T’ are compulsorily settled 2 days after the trade date.

Understanding Rolling Settlement :-

Rolling Settlement involves for major activities. Trading, Clearing, Settlement and Post Settlement(Post settlement has not been explained in this post).

Derivatives - What they are and their types...

IMF puts the definition of financial derivatives as ''Financial derivatives are financial instruments that are linked to a specific financial instrument or indicator or commodity, and through which specific financial risks can be traded in financial markets in their own right". A little complicated!!

click here to get a basic hold on to the derivatives and their types explained in a very good fashion...

Shares and Bonds

Shares

Equity Shares: An equity share, commonly referred to as ordinary share, represents the form of fractional ownership in a business venture.

Rights Issue/ Rights Shares: The issue of new securities to existing shareholders at a ratio to those already held, at a price. For  e.g. a 2:3 rights issue at Rs. 125, would entitle a shareholder to receive 2 shares for every 3 shares held at a price of Rs. 125 per share.

Bonus Shares: Shares issued by the companies to their shareholders free of cost based on the number of shares the shareholder owns.

Preference shares: Owners of these kind of shares are entitled to a fixed dividend or dividend calculated at a fixed rate to be paid regularly before dividend can be paid in respect of equity share. They also enjoy priority over the equity shareholders in payment of surplus. But in the event of liquidation, their claims rank below the claims of the company’s creditors, bondholders/debenture holders.

Cumulative Preference Shares: A type of preference shares on which dividend accumulates if remained unpaid. All arrears of preference dividend have to be paid out before paying dividend on equity shares.

Cumulative Convertible Preference Shares:  A   t ype of preference shares where the dividend payable on the same accumulates, if not paid. After a specified date, these shares will be converted int equity capital of the company.

Bonds

Bond: is a negotiable certificate evidencing indebtedness. It is normally unsecured. A debt security is generally issued by a company, municipality or government agency. A bond investor lends money to the issuer and in exchange, the issuer promises to repay the loan amount on a specified maturity date. The issuer usually pays the bond holder periodic interest

payments over the life of the loan. The various types of Bonds are as follows:

Zero Coupon Bond: Bond issued at a discount and repaid at a face value. No periodic interest is paid. The difference between the issue price and redemption price represents the return to the holder. The buyer of these bonds receives only one payment, at the maturity of

the bond.

Convertible Bond: A bond giving the investor the option to convert the bond into equity at a fixed conversion price.

Treasury Bills: Short-term (up to one year) bearer discount security issued by government as a means of financing their cash requirements.

Posts in the making!!!

I will be posting articles on these issues shortly....

1. Korean Peninsula and the Six party talks

2. Israel - Palestine conflict

3. Germany Hyperinflation 

4. Ratio Analysis Decoded