The trading procedure refers to the step-by-step process of buying and selling securities, like stocks, bonds, and derivatives, in the financial market. This procedure involves the placement of an order, its execution, clearance, and then settlement. Investors and traders follow certain rules and regulations to ensure a seamless transaction in the stock exchange. It also consists of importing and exporting commodities and services from a home country and another country. To understand the process of trading, every person wants to trade on the stock market, be they novices, seasoned traders, or individuals involved in international trade, since each transaction has a definite process and ensures the flow is free and fair.
Stock Exchange
Stock exchanges are marketplaces used by buyers and sellers to deal in financial securities, such as stocks and bonds. The mechanism provides a managed platform where corporations can raise money, and people can purchase shares. Major stock exchanges comprise trading procedures, but these procedures help create fairness and liquidity. Large stock exchanges worldwide comprise the NYSE, NASDAQ, the LSE of London, and the BSE of Bombay. Stock exchanges play a critical role in a country’s economy by helping companies raise funds and allowing investors to earn profits. Without a stock exchange, companies would find it difficult to expand, and investors would find it difficult to buy and sell shares efficiently.
Important Terms in Stock Exchange
Understanding the key terms in the stock exchange is necessary to grasp the trading procedure effectively. Here are some important terms:
- Stock – One unit of owning a company’s ownership.
- Broker – A person who is recognized as an agent to assist investment in buying or selling securities
- Bid Price is the highest price a customer is willing to pay for stocks.
- The asking Price is the least willing price offered by a customer to sell one stock.
- The difference between both prices is named the spread,
- Bull Market is a state where the values of stocks increase.
- Bear Market – A period when stock prices are falling.
- IPO (Initial Public Offering) – The process by which a private company becomes publicly traded.
- Dividends – Profits distributed to shareholders.
Trading Procedure of Stock Exchange
The trading process by the stock exchange has a series of stages that ensure the deal is fair and transparent. These are order placement, execution, clearing, and settlement.
- The registered stockbroker provides the platform for investors to place their buy or sell orders. The order is then transmitted to the stock exchange by the broker. These can be market or limit orders; the former gets executed at the prevailing price, while the latter is executed at a specified price.
- The system will match an order entered with the opposite order at the stock exchange. If a buyer wants to buy 100 shares at ₹500 per share, the system will match the same order with a seller offering the same terms.
- Once both orders are matched, it’s executed as a trade. Both sides confirm this through a confirmation request by the individual brokers.
- The clearing house takes the clearing process, and to a large extent, the house reduces the opportunities for defaults on the transaction end.
- Settlement is the last step in the trading process of the stock exchange. In India, most settlements are in the T+1 cycle, that is, settlement of trade on the next day. The buyer gets the shares, and the seller receives the payment.
Trading and Settlement Procedure
The trading and settlement procedure is the backbone of stock market operations. This guarantees that each trade takes place adequately and that parties to each transaction meet their obligations.
- The trading process involves placing an order, executing it, and confirming the transaction. The traders use brokerage platforms to buy and sell securities. Once a trade is confirmed, it enters the clearing and settlement phase.
- The clearing process ensures the verification and processing of trade transactions. In the clearinghouse system, intermediaries reduce the risk and ensure the buyer and seller meet trade conditions.
- The settlement process of stocks in India is T+1, i.e., all the trades get settled on the next working day. Buyers are given shares, and sellers are given payments, making the transactions frictionless.
Procedure of Export Trade
The procedure of export trade refers to the steps a business follows to sell goods to another country. Exporting helps companies to expand internationally and earn foreign exchange.
- Export Order Receipt – The exporter receives an order from a foreign buyer.
- Documentation Preparation – Documents like the invoice, packing list, and export license are prepared.
- Clearing of Customs- Customs will clear the shipment.
- Shipping Arrangements-Exporters make shipments for the merchandise.
- Insurance: Goods are covered against loss or damage while being transported.
- Recovery of Payments: Exporters recover payments via letter of credit or direct remittance from their banks.
Procedure of Import Trade
Import trade procedure is the process of buying from another country. Import trade permits companies to acquire goods that may not be found in the country.
- Order Placement of Import – This involves the importer making an order from the foreign provider.
- Agreement on Terms for Payment – The importer and exporter settle on terms of payment.
- Clearing in Customs – Imported goods undergo customs processes, wherein the exporter pays a large percentage of import duties.
- Goods Inspection – Authorities inspect the imported products to ensure compliance with standards.
- Delivery to Importer – After clearance, goods are delivered to the importer’s warehouse.
Trading procedure FAQs
What is the trading procedure in the stock exchange?
The procedure of the stock exchange relating to trading encompasses placing orders, execution, clearing, and settlement.
What is the procedure of export trade?
The export trade procedure includes accepting an export order, preparing documentation, obtaining clearances from customs, and arranging shipping with proper insurance coverage.
What is the procedure of import trade?
Import trade procedure incorporates placing an order, agreeing to payment terms, clearing customs, inspecting, and delivering them to the importer. This smoothes the international trade processes.
What is the role of a stock exchange in trading?
The stock exchange provides a regulated platform for buying and selling securities.
What is the difference between trading and settlement?
Trading refers to placing and executing orders in the stock market. Settlement is the final process where securities and payments are exchanged between the buyer and seller.
