what is trading mechanism how to work it step by step.

Jan 28, 2024 - 23:57
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what is trading mechanism how to work it step by step.
trading mechanism

The trading mechanism refers to the processes and rules that govern the buying and selling of financial instruments in a stock market. It outlines how orders are placed, matched, and executed. The specific details of the trading mechanism can vary between different stock exchanges, but here is a generalized step-by-step explanation of how trading typically works:

1. Opening Accounts:

  • Individuals who wish to trade in the stock market first need to open a Trading Account and a Demat Account with a registered stockbroker.

2. Placing Orders:

  • Investors use their Trading Accounts to place buy or sell orders. Orders can be market orders (executed at the current market price) or limit orders (set at a specific price).

3. Order Routing:

  • The stockbroker receives the order and routes it to the stock exchange. This can be done electronically through online trading platforms.

4. Order Matching:

  • On the stock exchange, buy orders are matched with sell orders based on price and time priority. The order book maintains a record of all open buy and sell orders.

5. Trade Execution:

  • When a buy order is matched with a corresponding sell order, a trade is executed. The stock exchange confirms the transaction, and the trade details are sent back to the broker.

6. Trade Confirmation:

  • The broker notifies the investor of the executed trade. This confirmation includes details like the price, quantity, and time of the trade.

7. Clearing and Settlement:

  • The trade moves to the clearing and settlement phase. The stock exchange's clearinghouse ensures that the buyer receives the securities, and the seller receives the funds. This process typically follows a T+2 (Transaction date plus two business days) settlement cycle.

8. Dematerialization and Crediting:

  • In the case of securities, the sold shares are debited from the seller's Demat Account, and the bought shares are credited to the buyer's Demat Account.

9. Funds Transfer:

  • In the case of funds, the money is transferred from the buyer's trading account to the seller's trading account.

10. Account Updates:

  • The broker updates the investor's Trading and Demat accounts with the executed trade details. Investors can access these details through their online trading accounts.

11. Market Surveillance:

  • Throughout the trading day, the stock exchange conducts market surveillance to detect irregularities, monitor price movements, and ensure fair and transparent trading.

Important Points to Consider:

  • Trading Hours: Stock exchanges have specific trading hours, and orders can only be placed during these times.

  • Circuit Breakers: Stock exchanges may implement circuit breakers to temporarily halt trading in the event of significant market movements.

  • Regulatory Oversight: Trading activities are regulated by government authorities or independent regulatory bodies (e.g., SEC in the United States, SEBI in India) to ensure fair and transparent practices.

  • Brokerage Charges: Investors may incur brokerage fees and other charges for executing trades. These fees vary among brokers.

  • Risk Management: Investors often use risk management tools such as stop-loss orders to limit potential losses in case the market moves against their positions.

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