How the stock market works: the journey of one buy order

Who is involved when you buy a share?

Five parties handle every share purchase in India: you, your stockbroker, the stock exchange, the clearing corporation and the depository. SEBI, the regulator, sets the rules for all of them.

It helps to meet them before we follow the order. Each one has a narrow job, and none of them does the others' work.

• Stockbroker. A SEBI-registered firm that gives you an app or website, checks that you have enough money, and sends your order to the exchange. Only brokers who are members of an exchange can place orders on it, which is why you cannot go to the exchange directly.
• Stock exchange. NSE or BSE. It runs the computer system where buy and sell orders meet. It matches orders, publishes prices and watches for unusual trading.
• Clearing corporation. A separate company linked to each exchange. NSE Clearing Limited is NSE's clearing corporation, and BSE Clearing Limited (formerly called Indian Clearing Corporation Limited) is BSE's. It works out who owes what after trading and makes the exchange of money and shares happen.
• Depository. NSDL or CDSL. It keeps the electronic record of who owns which shares. Your demat account is an account with a depository, opened through a depository participant, which is often your broker.
• Your bank. Money moves from your bank account to your broker before you buy, and back to your bank when you withdraw.

If any of these words are new, the page on stock market basics for beginners covers the very first ideas.

What happens on Monday morning when you place the order?

When you place an order, your broker first checks that you have enough money, then sends the order to the exchange in electronic form. This takes a fraction of a second.

Meet Kavya, a made-up learner in Coimbatore. ABC Limited is a made-up mobile company listed on NSE. All prices are invented.

On Monday, Kavya has Rs 3,000 in her trading account, moved there earlier from her bank. At 10:30 IST she places a limit order to buy 10 shares of ABC at Rs 250 each. A limit order means "buy only at Rs 250 or less". (The page on market order vs limit order explains this in detail.)

The arithmetic her broker checks:

• 10 shares x Rs 250 = Rs 2,500 for the shares.
• Added to this are charges such as brokerage, exchange fees, taxes and stamp duty. They vary by broker and by the size of the trade, so let us just call them "a small amount".
• Rs 3,000 is more than Rs 2,500 plus charges, so the order is accepted. The broker blocks about Rs 2,500 plus charges so Kavya cannot spend it twice.

If she had only Rs 2,000, the broker would reject the order before it ever reached the exchange. The broker checks the money before the order goes out, so it has to be in the account first.

How does the exchange match a buyer and a seller?

The exchange keeps a list of all waiting buy and sell orders for each share, called the order book. It matches a buy order with a sell order when their prices meet, giving priority first to the better price and then to the earlier order.

At 10:30 on Monday, ABC's order book on NSE looks like this (made-up numbers):

Kavya's order arrives: buy 10 at Rs 250.00. A seller, Ravi in Pune, is already waiting with 50 shares at Rs 250.00. The prices meet, so the exchange matches 10 of Ravi's shares with Kavya's order. The trade is done at Rs 250.00. Ravi still has 40 shares waiting.

Kavya and Ravi never learn each other's names. The exchange does not pick a side or set the price. It only applies the matching rules the same way for everyone. Within seconds, Kavya's app shows "Executed", and the broker later sends her a contract note, a formal record of the trade with the price, quantity and charges.

The trade day is called T, for trade. Monday is T.

What does the clearing corporation do on Monday evening?

After trading closes, the clearing corporation works out exactly how much money and how many shares each broker must hand over. It also steps in between buyers and sellers, so that the trade can still settle if one side fails to pay or deliver.

Thousands of brokers trade crores of shares every day. Settling each trade one by one would be chaos. So the clearing corporation adds up every trade done by each broker and arrives at one net figure per broker: this much money to pay in, these many shares to deliver.

Its second job matters more for your protection. Legally, once the trade is matched, the clearing corporation becomes the buyer to every seller and the seller to every buyer. This is called novation. Kavya's trade is no longer really with Ravi. It is with the clearing corporation. If Ravi's broker failed to deliver, the clearing corporation, not Kavya, would deal with the shortfall.

To cover such failures, the clearing corporation collects margins (security deposits) from brokers in advance and keeps a fund built for defaults. This is why the system can keep working even when one member gets into trouble.

What happens on Tuesday at settlement (T+1)?

India settles most equity trades on T+1, one working day after the trade. On Tuesday, money moves from buyers' brokers to the clearing corporation (pay-in), and the clearing corporation then sends shares to buyers and money to sellers (pay-out).

Here is Kavya's full timeline in one place. Times are rough and shown only to give the order of events.

1. Monday (T), 10:30 IST. Kavya's buy order is matched with Ravi's sell order at Rs 250. Rs 2,500 plus charges is blocked in her trading account.
2. Monday, after market close. The clearing corporation calculates every broker's net obligation. Kavya receives her contract note by email.
3. Tuesday (T+1), funds pay-in. Kavya's broker pays the money for all its clients' purchases, including her Rs 2,500, to the clearing corporation.
4. Tuesday, securities pay-in. Ravi's broker delivers his shares from his demat account to the clearing corporation. When Ravi sold, he authorised that debit from his demat account, for example with a PIN or OTP from his depository.
5. Tuesday, pay-out. The clearing corporation credits 10 ABC shares directly into Kavya's demat account. Since November 2024, SEBI rules require pay-out of shares straight to the client's demat account instead of passing through the broker's own account. Ravi's broker receives Rs 2,500 for him, and his trading account balance goes up. He can then ask his broker to send it to his bank.

If Tuesday is a stock market holiday, T+1 moves to the next trading day. T+1 counts trading days, not calendar days. An optional same-day (T+0) settlement also exists for a limited set of shares, but most trades settle on T+1.

Who protects what along the way?

Each party protects a different part of the journey: the broker holds your money under SEBI rules, the clearing corporation stands behind settled trades, the depository protects the ownership record, and the exchange and SEBI watch everyone. None of them protects you from a fall in the share price.

The last column is the important one. The plumbing is there so that Kavya gets the 10 shares she paid for. It does nothing to stop ABC's price from falling from Rs 250 to Rs 200 next month. Market risk, the chance of loss from price changes, always stays with the investor.

What about a sell order? The same road in reverse

Selling follows the same path backwards: your shares leave your demat account on T+1, and the money reaches your trading account on T+1. You then withdraw it to your bank.

Suppose that on Wednesday Kavya sells her 10 ABC shares at Rs 256. The arithmetic: 10 x Rs 256 = Rs 2,560 before charges. Compared with her cost of Rs 2,500, that is a difference of Rs 60, from which buying and selling charges (and any tax) must be taken away. A small price gain can shrink sharply once charges are counted, and a price fall would have meant a loss.

Her sell timeline:

• Wednesday (T). She places the sell order and authorises the debit of 10 shares from her demat account through her depository's PIN or OTP step.
• Thursday (T+1). The shares go from her demat account to the clearing corporation, and the buyer's money comes through. Rs 2,560 minus charges appears in her trading account.
• After that. She can ask her broker to transfer the balance to her bank account.

One extra point: brokers also return unused client money to clients' bank accounts on a regular cycle under SEBI's rules, even if the client does not ask. Your broker's website explains its own cycle.

Common mix-ups

Most confusion about how the market works comes from mixing up who does which job. Here are five common mix-ups, each corrected.

1. "I bought the share from the exchange." No. You bought it from another investor, Ravi in our example. The exchange only matched you. With a new share issue (an IPO) you buy from the company, but day-to-day trading is always between investors.
2. "My shares are kept with my broker." Your shares are recorded in your own demat account at a depository, in your name. The broker is your gateway to that account, not the owner of the shares.
3. "Executed means the share is mine right now." The trade is fixed when it executes, but settlement, when the share lands in your demat account, normally happens on T+1.
4. "T+1 means 24 hours later." It means one trading day later. A Friday trade usually settles on Monday, and holidays push it further.
5. "The clearing corporation protects me from losses." It protects the settlement of the trade, not the value of the share. If the price falls, the loss is yours.

For quick definitions of any term on this page, see the stock market terms glossary.

Check yourself

Three quick questions to test what you have read. The answers are right below each question.

1. Kavya buys 10 ABC shares on a Thursday. If Friday is a normal trading day, when do the shares reach her demat account?
   Answer: on Friday, which is T+1.
2. Which organisation becomes the buyer to every seller and the seller to every buyer?
   Answer: the clearing corporation, through novation.
3. Kavya places a limit order to buy 20 ABC shares at Rs 250, with Rs 4,000 in her account. Will the broker accept it?
   Answer: no. 20 x Rs 250 = Rs 5,000, which is more than Rs 4,000, even before charges.

Want to see your own reactions when a made-up price moves? Try the free MarketMind Challenge.

Where to check this yourself

These official websites publish the rules, timings and investor guides behind this page. Start with SEBI's investor website if you are new.

• SEBI, the market regulator
• SEBI's investor education website
• National Stock Exchange (NSE)
• BSE
• NSDL, a depository
• CDSL, a depository

Next, read demat account explained to see exactly where your shares sit after settlement.