Methods of Trading in a Stock Exchange

Methods of Trading in a Stock Exchange:

The stock exchange operation at follow level is highly technical in nature. Nonmembers are not permitted to enter into the stock market. Hence, various stages have to be completed in executing a transaction at a stock exchange. The steps involved in the methods of trading have been given below:

1.     Choice of Broker:

The prospective investor who wants to buy shares or the investor who wants to sell his shares cannot enter into the hall of exchange and transact business. They have to act through only member brokers. They can also appoint their bankers for this purpose, since; bankers can become members of the stock exchange as per the present regulations. So, the first task in transacting business on a stock exchange is to choose a broker of repute or a banker. Such persons alone can ensure prompt and quick execution of a transaction at the best possible and profitable price.

2.     Placement of Order:

Placement of order refers to the purchase or sale of securities with the broker. The order is usually placed by telegram, telephone, letter, fax etc., or in person.

3.     Execution of Orders:

The Orders are executed through their authorized clerks. Small one carries out their business personally. Orders are executed in Trading ring of a stock exchange which works from 12 noon to 2 p.m. on all working days from Monday to Friday and a special one hour session on Saturday. Trading outside the trading hours is called kerb dealings.

(1) Preparation of Contract Notes:

A  contract  note  is  a  written  agreement  between  the  broker  and  his  client  for  the transactions executed. It contains the details of the contract made for the purchase/sale of securities, the brokerage chargeable, name of the company, number of shares bought/ sold, net rate, etc., it is prepared in a prescribed from and a copy of it is also sent to the client.

(2) Settlement of Transactions:

The settlement of transactions is made by means of delivering the share certificates along with the transfer deed. The transfer deed is duly signed by the transferor, i.e., the seller. It bears the stamp of the selling broker. The buyer then fills up the particulars in the transfer deed.

At present, the settlement can be made by any one of the following methods;

•Spot delivery settlement:

i.e., the delivery of securities and payment for these are affected on the date of the contract itself or on the next day.

•Hand Delivery Settlement:

i.e., the delivery of securities and payment are affected within the time stipulated in the agreement or within 14 days from the date of the contract whichever is earlier.

•Clearing Settlement:

i.e., the transactions are cleared and settled through the clearing house. Usually those securities which are frequently traded and are usually in demand are cleared through the clearing house. These transactions are also referred to as the transaction for the account.

•Special Delivery Settlement:

i.e., the delivery of securities and payment may take place at any time exceeding 14 days following the date of the contract as specified in the contract and permitted by the governing board.