The other kind of settlement, also prevailing in our system, is called ‘short-time
settlement’, where transactions have to be settled within 48 hours.
Buying a Share
One will purchase a share at the existing market price, expecting that its price will rise in
the future. If however, one does not have enough cash to purchase these shares, one may
purchase the shares under the ‘settlement system’, described below.
What is a settlement System?
The price of a share has two levels.
- The price as it exists on the settlement date, also known as settlement price. (the
price at the last hour to be considered) - Purchase price
There may be two possibilities on the settlement day, namely, (i) the settlement price is
higher than the purchase price, (ii) the settlement price is lower than the purchase price.
In the first case both the buyer and the seller may forward the transactions. The seller
accommodates the buyer to the extent of the difference between the settlement price and
the purchase price, and also provides time to make cash payment. The buyer must
compensate the seller in terms of interest. This is known as Contango or Forwardation
charge.
In the second situation, the purchase price is higher than the settlement price. In this
case, the buyer will pay the difference. The transactions price will be based on the
settlement price. The buyer shall pay the Forwardation charges.
Bulls & Bears
An investor who expects the price of a particular security to rise, and purchases a large
amount of shares on that expectation, is called a Bull. The opposite is Bear.
Selling
If a share holder anticipates a fall in the price of a share, he would like to sell before the
price drops. He may even sell a share which he does not have. This may be done under
the “Settlement System”. When the settlement price is lower than the selling price, the
buyer has to pay the difference and the Forwardation charges. If the settlement price is
more than selling price, the difference will be paid by the seller and the seller receives the
Forwardation charges.