When you are in the financial world, you must know that the stock settlement time is T+2 around the globe. Some countries, except the USA, Germany and Japan, have even longer settlement times than this.
As India is developing its prominent presence in each sector, how can we leave the financial one? The SEBI - Security Exchange Board of India announced to follow the T+1 Settlement cycle, and thus since January 2023, India has been following the same. Although settling every type of financial asset in that duration is impossible, implementing the T+1 cycle will take place gradually after completing one phase.
Is T+1 Settlement compulsory for all stocks?
Before jumping right into the compulsion and not, we should first understand what it means. The T+1 settlement cycle implies the delivery of the asset will be carried out in one day. It used to take 2 full days to reflect the asset or the money (in case of selling). Suppose you have purchased N number of shares; these will reflect in your account the next day of your purchase.
Let us assume; you purchased the 100 shares of ABC limited on Wednesday; they will be reflected in your account on Thursday.
But, for all the above procedures to take place, the primary thing which you must have is a - Demat account. You must have one demat account where all your transactions will be recorded, and you can execute them however you want. It has many advantages, though; let's avoid getting into this.
Opening an account and putting in some money is not enough. You must also be aware of how the market works, its terminology and various other concepts of trading and investing in the stock market.
As we said, implementing the T+1 is quite complex, considering the volume of the stocks being traded daily. Thus, SEBI is implementing it in a stage-wise manner. In the initial stage, the process started with the small capital stocks.
Gradually, after completing the stages one after another, the last stage is 250 large capitalized shares. This also includes the Bank Nifty index. Don't worry, every stock follows the T+1 cycle, but it's easy to manage the small capital stock and check its effectiveness.
What impact does T+1 have on traders and investors?
In earlier times, when there was a T+2 settlement cycle, traders and investors would have to wait for the next two days to get the amount credited to their account or shares in their demat account.
But, now, with the change in the settlement cycle of T+1, the delivery of the assets and the capital gains will be made on the next day of the transaction. Suppose you bought the shares on Wednesday; they will get reflected in your account on Thursday.
There has been a very positive impact on traders and investors due to the T+1 settlement cycle. As the efficiency of trading has been improved in the market. As the time factor, which traders know by Theta, has a significant role, traders get their trades wrapped one day earlier, which allows them more time for the next transactions. The average number of trades in a month also has increased due to the earlier settlements.
What is the impact of T+1 Settlement on Foreign Investors:
There was some distress in the earlier stage regarding foreign investors due to the short settlement period. The Indian traders would generally have their funds in a single market, but that's not the case with FPIs; they have their funds invested in various global markets. Nowadays, technological advancement and increasing digitization have made everything easy, effortless, and fast.
The T+2 system prevailed throughout the globe, and they all supported FPI, and the overall system was running smoothly. Introducing the T+1 system made them a bit worried about matching the Indian market standards. But they soon caught up with that as there were a lot of investment opportunities for foreigners.
To help them catch up with this change in the settlement cycle, the Security Exchange Board of India and Reserve bank of India has helped by providing them with the liberty to carry out the transactions in the evening. Every change might seem difficult in the early stage, but you will realize its benefits when you get used to it.
How will this T+1 Settlement cycle be beneficial for the Indians?
Trading and investing in the stock market are considered the best method to earn an excellent passive or full-time income. High returns are the main reason investors stay in trading for a longer time. Many traders are concerned about the convenience.
Suppose they are already doing a job and have to manage the trading simultaneously, then they might step back, but thanks to technology that has made everything automated and effortless. And now, with the announcement of the T+1 settlements, the convenience is more, and all the traders seem happy with this decision.
There are still demands to reduce it to T+0, meaning the delivery should be completed on the same day of the transaction, but everything works step by step. We can best hope that in the coming years, we can achieve that too; till then, let us see the advantages of the T+1 settlement cycle for Indian traders.
The delivery is quick compared to the T+2 settlement mechanism.
If a trader has taken a loan for trading or buying equity, then he can save the interest for one day.
SEBI has come up with advanced technology to match up with this change and ensure transactions are executed in an efficient way.
The shorter settlement cycle helps traders explore more opportunities and conduct more transactions.
Suppose you are investing in the global markets. We are saying to invest in the global market because the Indian market has liberalized the rules to invest in foreign markets. In that case, you must remember one thing the settlement cycles in the majority of countries, such as the USA, Japan, Europe, Hong Kong etc.
Still follow the T+2 cycle, so in that case, you will not have the chance to enjoy the above-listed benefits. Still, you may enjoy higher profits due to the currency conversion ratio. For better capital gains, try checking out the latest upcoming IPOs in the global segment; further, remember to check the company's financial health, its strengths and weaknesses, major competitors and the most critical future projections.