A stock market transaction involves four key participants: the trader, broker, stock exchange, and clearing house.
- Trader: This is the investor or individual who buys or sells stocks. They initiate the transaction by placing orders.
- Broker: Brokers act as intermediaries between traders and the stock exchange. They process the trader’s orders and ensure they are executed on the exchange.
- Stock Exchange: The exchange is the platform where the buying and selling of stocks occur. It matches the buy and sell orders from traders.
- Clearing House (Clearing Corporation): The clearing house ensures that all trades are settled correctly. It guarantees that the buyer gets the stocks and the seller receives the money by handling the clearing and settlement process.
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What is a Clearing Corporation?
A clearing corporation is a special organization that helps make buying and selling of financial products, like stocks or bonds, safe and smooth. It is also known as Clearing Firm or Clearing House.
Function of a Clearing House
- It acts as a middleman between the buyer and seller.
- It makes sure both parties follow the rules and complete the trade.
- It guarantees that payments are made and shares are delivered properly.
Think of it like a referee in a game, ensuring everything happens fairly and no one cheats. This way, traders can trust that their deals will go through without problems.
What does Trade Settlement mean?
Trade settlement refers to the process of completing a trade in the stock market. It ensures that the buyer receives the securities they purchased and the seller receives the payment for those securities.
Settlement typically occurs within a specific time frame after the trade is executed, known as the T+1 or T+2 cycle (Trade Day + 1 or 2 working days).
The clearing house oversees this process, guaranteeing accuracy and security, and resolving any discrepancies.