by Trading is the process of executing a buy or sell order for a security on a stock exchange. It occurs in real-time on an electronic, screen-based platform where buyers and sellers place their orders. The exchange’s system matches these orders based on price and time priority, resulting in a confirmed trade. This stage determines the execution price but does not immediately transfer securities or funds.
Settlement is the subsequent, back-end process of fulfilling the trade obligations. It involves the exchange of securities for cash. In India, this follows a T+1 cycle, meaning the settlement is completed one business day after the trade date (T). The clearing corporation acts as the central counterparty, guaranteeing the settlement. It involves the broker debiting the buyer’s account for funds and the seller’s demat account for securities, with corresponding credits made to the other party, finalizing the transaction.
Procedure for Trading (Overview):
The trading procedure in the Indian stock market is fully automated and conducted through online platforms of recognized exchanges such as NSE and BSE using systems like NEAT (NSE) and BOLT (BSE). Investors place buy or sell orders through registered brokers, who enter them into the exchange’s electronic order book. Orders are matched automatically based on price and time priority. Once a trade is executed, it is confirmed electronically, and details are sent to both parties. The trade is then forwarded to the clearing and settlement system, where securities and funds are exchanged. Settlement usually occurs on a T+1 basis (one business day after the trade). The entire process is regulated by SEBI to ensure transparency, efficiency, and investor protection, minimizing counterparty and operational risks.
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Buying Order
A buying order is placed when an investor wishes to purchase shares. The investor instructs the broker with details such as the company’s name, number of shares, and price preference (market order or limit order). A market order executes immediately at the best available price, while a limit order executes only at or below a specified price. Once entered into the trading system, the buy order remains active until it matches a corresponding sell order. Upon execution, the investor becomes the owner of the shares after settlement on the T+1 day. The broker issues a contract note confirming the transaction. Buying orders are crucial for maintaining market demand and price movement. Investors typically buy shares for capital appreciation, dividends, or long-term investment.
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Sell Order
A sell order is placed when an investor decides to sell shares already owned or intends to short-sell shares in the market. The investor provides order details such as the stock symbol, quantity, and selling price. Like buy orders, sell orders can be market orders (executed immediately) or limit orders (executed at a specific minimum price). Once matched with a buy order, the transaction is confirmed electronically. After settlement, the seller receives payment, and ownership of shares is transferred to the buyer. The Demat account of the seller is debited, and the buyer’s account is credited with the securities. SEBI and exchanges monitor all trades to ensure fair practices and prevent price manipulation or insider trading.
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Long and Short Positions
A long position refers to buying a security with the expectation that its price will rise in the future, allowing the investor to sell it later at a profit. It represents ownership of the asset. Investors typically take long positions for medium- to long-term gains or dividends.
A short position, on the other hand, involves selling borrowed securities with the hope of repurchasing them later at a lower price. It is used by traders anticipating a price decline. Short-selling is regulated by SEBI and is allowed only in specific conditions. Traders must borrow shares through an approved lending mechanism and maintain margin requirements. Both long and short positions contribute to market liquidity and price discovery, reflecting investor sentiment and market direction.
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Bid and Ask Price
The bid price represents the highest price that a buyer is willing to pay for a security, while the ask price (or offer price) is the lowest price at which a seller is willing to sell it. The difference between the two is called the bid-ask spread, which indicates market liquidity and trading activity. A narrow spread suggests high liquidity and active trading, while a wide spread signals lower liquidity. Orders in the stock market are matched when the bid and ask prices coincide. The continuous adjustment of these prices reflects real-time demand and supply forces. Stock exchanges use automated order-matching systems to execute trades transparently, ensuring fair pricing and efficient market functioning.
- Volume
Volume refers to the total number of shares or contracts traded in a particular security or market during a specific period. It is an important indicator of market activity and investor interest. High trading volume often signals strong momentum and confirms price trends, whereas low volume may indicate weak investor participation or uncertainty. Exchanges report volume data daily, helping traders assess the strength of market movements. Analysts use volume patterns to validate breakouts or reversals in prices. In India, volume data for all listed securities is available on BSE and NSE portals. High-volume stocks generally have better liquidity, allowing investors to buy or sell easily without significant price fluctuations.
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Stop Loss
A stop-loss order is a risk management tool used by traders and investors to limit potential losses. It automatically triggers a sell (or buy) order when a security’s price reaches a predetermined level. For example, if an investor buys a stock at ₹500 and sets a stop loss at ₹470, the system will automatically sell the stock if its price falls to ₹470, minimizing loss. Stop-loss orders are especially useful in volatile markets, helping investors manage emotional decision-making and preserve capital. They can be placed as stop-loss market orders (executed at the best available price) or stop-loss limit orders (executed at a specific price). In India, all major trading platforms support stop-loss features, promoting disciplined and safer trading practices.
