Trading procedure on a stock exchange
Prior to introduction of computer based online trading, trading used to be done in the trading hall of a stock exchange. This system was full of shortcomings,hence replaced by online trading. The ususal online trading procedure is as follows:
1. Contacting a broker: any investor, willing to invest in stock exchange is required to get itself registered with a broker and complete the required formalities. Depending upon the type of trading practice, the broker may provide him the trading facility, e.g. a combination of direct online service, through branch and phone calls.
2. Placing an order: after the type of facility is decided, an investor may place, buy or sell order as the case may be. An order may be placed in two forms, at market rate or desired rate. In case of market rate order is executed immediately. In case of desired rate, transation will be executed only when the desired rate comes.
3. Execution of order: When buy/sell orders are fed into a computer either by an investor or by a broker, the list of executed orders are prepared. The broler informs the investor by call or by mail and prepares a contract.
4. Settlement: all the transactions taking place in a day are settled by the stock exchange on the appointed day. Net results of all the transactions done by a broker are settled which shows how much money each broker will receive or deposit. The broker in turn settles his accounts with his individual investors.
The above settlement is relevent to cash segment of a stock exchange. Besides cash segment, NSEI and BSE have derivative segments in which securities do not exchange hands but only difference in prices of the securities is settled. This is called forward trading.
Important terms related to stock exchange
1. Dematerialisation: these days . securities like equity shares are not allotted in paper form. When records like ownershipof stocks is kept in electronic form instead of physical form(i.e. share certificates) it is known as dematerialisation of securities. It helps in overcoming the problem of theft, forgery, delays, misplaced certificates and unnecessary paper work.
2. Demutulisation: The purpose of demutulisation is to protect the interests of the investors and to reduce the chances of brokers using the exchange for their personel gains. It is the process that separates the trading rights of members or brokers in a stock exchange from its ownership and control.
