Fintech- The NewTrading System in The Stock Market

Dematerialization of equity

Fintech has been a great boon to the stock market trading all over the world. Earlier, all trading was done on the ring or the actual place of trading. The stocks used to be traded twice a day and so trade was limited.

Fintech brought in a complete change in the system of stock markets. The complete trading is now being carried out through the computer or through a mobile phone. To build this system, the first thing that was started was that stocks would no longer be distributed by corporate houses in physical form.

The format was simple. Stocks were to lose their individuality. There would be no numbers on them and there was no need to save them in filing cabinets at home. An online system would be developed bringing ease and comfort in the lives of people. There would be a regulator, which in India is the Securities &Exchange Board of India.

What was this system? This was called the dematerialized system or entering a new world of record-keeping and trading through the computer by using fintech.

The significance of the fintech world of trading

• There are fewer risks. This system does not have any physical certificates and they are no longer valid. The problems of fake deliveries and certificates do not persist.
• The transfer of securities is immediate as it is an electronic mode of transfer.
• A dematerialized (demat) account come with a client identification number and a depository identification number. Each member has a special identity, a trading account, provided by a Depository Participant (DP)
• The DP is entitled a yearly charge for maintaining the member's account,
• Investors can sell their stock in Odd Lots even one equity share can be sold.
• There is a nomination facility, stock can be easily transferred at the time of death of a participant. This was exceedingly difficult with a lot of paperwork earlier.
• The Change in the address is easily registered with all companies in which investor holds securities electronically so the need for correspondence with each company is eliminated.
• Automatic credit into demat account of stocks is made in the bank account registered. Such credits or debits arise out of sale and purchase, bonus, splits, consolidation, mergers etc.

2. What is the operational part of the fintech world?

This new world of fintech calls it the Depository system. In India, the person who opens the accounts and acts as the intermediary is known as the Depository Participant (DP).

1.A depository operates in the following manner:

(a) Depository: is similar to a bank. An investor can buy and sell securities and the depository records it like a bank by taking stock of all the transactions that take place..

(b) Depository Participants (DP): A DP is the most important person. He acts as a linking factor in the life of an investor with the depository. An investor has to compulsorily open an account with any of the Depository Participants (DP’s) registered with the stock market and the depository.

Share brokers, banks, financing institutions and custodians can opt to be a DP after they are registered with the regulator which in the Indian context is Securities & Exchange Board of India (SEBI)

( C)Opening an Account: A person interested in the purchase and sale of stocks has to open an account with the DP and follow the procedure outlined or he will be disqualified from trading.

A form must be filled with details of name age and identity proofs with photos have to be attached with proof of signatures. An agreement has to be signed between the investor and the has to sign an agreement with DP. This is mandatory. It gives in detail the investors and DPs rights and duties with a schedule of charges.

(d) Identification Number: The DP will open investors’ account in the trading system and gives an account number, called BO ID (Beneficiary Owner Identification number). An investor can have multiple accounts in the same name with the same DP and also with different DPs.

(e) Online Trading: A broker is not required as trading is now online. Anyone can do it from home. Trading and settlement all take place when you have a demat account with a trading ID through any digital medium.

(h) Distinctive Numbers: Dematerialized stocks do not have any distinctive numbers. These stocks are fungible, which means that all the holdings of a particular security will be identical and interchangeable.

2. Purchase and Sale of Dematerialized Shares

Trading: When a person trades sitting at home, the DP immediately sends contract note which is signed by the buyer of securities and the seller of securities online.

Clearing: The DP then sends it for clearing to either National Securities Depository Ltd(NSDL) or to Central Depository Securities Ltd.(CDSL).

Transaction settlement: In India, we work on the multi depository system of clearinghouses. We have two clearinghouses, the NSDL and the CDSL for clearing. This is then cleared and it takes the transaction date + 2 days to complete the cycle and finally it is sent to the depository with the names changed of the buyer and seller.

Transfer of securities: In the companies records, the new names are changed and entered in the depository. The settlement has taken place and the buyer and seller have either paid if bought or received the money, due on sale, of the equity stock.

3. Transaction Statement

The DP gives a Transaction Statement periodically, which details current balances and various transactions made through the depository account. once in a quarter. The clearinghouse to which you have been registered by your DP also sends a statement periodically, so you know what you have or what you owe others and details of stock in your name.

To conclude In the depository system, the transfer takes place through online trading. The clearing also happens and completes on the transaction day plus two more days. There is no physical handling of shares and the procedure consists of the simple steps like opening an account with a DP.

Fintech has certainly changed the trading system in stock markets remarkably, by a complete overhaul of the physical system. Trading all over the world has increased and trading moves with great speed, the speed of lightening. The high volume of trade and the exchange of money necissiated his change.