Settlement
Settlement
If you're new to the world of trading, you may have come across the term "Settlement". This term is often thrown around in financial circles. But, what exactly does it mean, particularly in the area of Trading? Let's delve into understanding this term's Significance and Application.
What is Settlement?
The term "Settlement" refers to the official transfer of securities to the buyer's account and the payment made to the seller. This is the final step in a securities trade after executing the order. To put it simply, it's when the buyer pays the seller for the securities they have bought, and the seller delivers the securities to the buyer.
Settlement Period
The time between the execution of a trade and the settlement is known as the "Settlement Period". During this time, the buyer should make the necessary arrangements for the payment, and the seller should arrange for the securities to be delivered. The aim is to ensure that the trade is fully completed, and it's when the trade effectively becomes 'Binding'.
Importance of Settlement in Trading
So, why is the settlement phase so important in the world of Trading? The key reason is that it ensures the completion of a trade, as it's the final element in the Trading process where the exchange of money for securities takes place. From a trader's perspective, the significance of the settlement process cannot be over-emphasized, as non-settlement poses a massive risk.
Types of Settlement
Settlements can occur in two ways: Physical Delivery and Cash Settlement. Physical Delivery means the actual assets are handed over from the seller to the buyer. Cash Settlement means the difference in the asset price is exchanged between the two parties instead of the actual asset.
Settlement Risk
Every trade comes with a certain level of risk known as Settlement Risk. It refers to the chance that one party will not deliver on their end of the deal at the time of the settlement. This could be either the payment not being made or the securities not being transferred as agreed.
In conclusion, understanding Settlement in trading is important for anyone who participates in the trading market, be it an experienced professional trader or a novice in the field. It is, after all, essential to realize when and how you would get ownership of your new assets, or when you'd get paid after you have sold an asset.
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