The ability to hold shares and other securities in electronic form is possible with a demat account. For trading shares and other securities on the stock exchange, it is a prerequisite. The settlement of a trade when you purchase or sell shares in a demat account happens on the T+1 or T+2 day. T+1 denotes that the trade settlement occurs the day after the trade is executed. T+2 indicates that the trade settlement occurs two days after the trade is executed. Check more on What is demat account?
For instance, if you purchase 100 shares of a corporation on a Monday, the trade will be settled on a Tuesday (T+1). On Monday, if you sell 100 shares of a corporation, the sale will settle on Wednesday (T+2). Both purchasers and sellers of shares are protected by the T+1 and T+2 settlement procedures. It makes sure that before the shares are transferred, both parties have enough time to finish the required paperwork and make the required payments. A few advantages of the T+1 and T+2 settlement system for demat accounts are listed below:
It safeguards investors: If you purchase shares on Monday, you will receive them in your demat account by Tuesday. This provides you time to either stay onto the shares for the long term or sell them if necessary. Sellers are protected because they know they will get their money by Wednesday if they sell their shares on Monday. This allows you time to use the money for other things or to deposit it into your bank account. Check more on What is demat account?
It encourages liquidity: Using a demat account to buy and sell shares is made simpler by the T+1 and T+2 settlement system. This is due to the knowledge among buyers and sellers that the transaction would be completed swiftly and effectively. It lowers risk: The possibility of fraud is decreased by the T+1 and T+2 settlement system. This is so that the transfer of the shares can wait until the trade has been completed. Listed below are various T+1 and T+2 settlement system drawbacks:
It might stall the money transfer: If you sell shares on Monday, the money won’t arrive in your account until Wednesday. If you need the money immediately, this could be an issue. Check more on What is demat account?
It may restrict the types of investments you can make because certain financial instruments, including margin trading, call for the shares to be settled on the same day. If you have a demat account, it may be challenging to invest in certain items because of this.
Costs may rise as a result: The cost of trading shares may go up with the T+1 and T+2 settlement system. This is because the clearing corporation and the depository both require brokerage firms to pay them fees.
In general, both buyers and sellers of shares are well-protected by the T+1 and T+2 settlement mechanism. It does, however, have several shortcomings that you ought to be aware of. Check more on What is demat account?
