What is Equity Delivery?

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Buying stocks is more straightforward, especially after transitioning to electronic and digital channels. However, few things have remained the same, such as how and when stocks get delivered. It is also valid for a few trading parts, such as intraday trading and equity delivery. Today, we learn what equity delivery is and why you must know about this.

Equity Delivery Meaning

In the Indian stock market, when an investor buys or sells, their stakes are not settled immediately or on the same day. The transactions follow a T+2 settlement cycle. Thus, if a buyer purchases a stock on Monday, those shares would be delivered to their DEMAT account on Wednesday.

When the stocks get delivered to their DEMAT account, the account holder can sell or hold them as per his convenience. This is called equity delivery. In this case, the person holding the shares is the owner of the stocks. 

Delivery-based trading is one of the many ways one can trade in the Indian stock market. In delivery-based trading, one can hold the shares for as long as they desire after they have been delivered to the investor’s account. The investor has complete ownership of what stocks to buy and how long to wait for an excellent opportunity to sell, taking home a good profit. 

This is the different from other stock trading types, such as intraday trading, wherein one can buy and sell stocks within the same trading day. 

What is the T+2 Settlement framework?

In the Indian stock market, share transactions do not get delivered at the very instance when they are bought or sold on the same day. These transactions must follow a settlement cycle known as the T+2 cycle. Generally, as per theT+2 settlement cycle; transactions must be completed in the timeline of T+2 days that is, Trading Day + 2 Working Days.

Consider an investor has purchased many stocks on Monday; these stocks are not sent directly to their DEMAT account. This transaction will take T+2 Days, Monday, and two more Working days, which means by Wednesday. In the T+2 settlement phase, the investor can not sell their stock before delivery or make a short position, as the investor has still not received the shares and hence does not own them. Once the shares are delivered to their account, they can hold them for as long as possible and sell them according to their wish. This is the T+2 cycle framework in equity delivery.

Does Equity Delivery Have Any Costs?

When investors buy a stock of any company, they purchase it through a brokerage firm or a broker on a website or any digital application. When you trade on a stock or make a transaction, some part as commissions or brokerage is deducted. 

Advantages of equity delivery:

In the process of equity deliveries, investors get many benefits: 

• It gives you time to decide on your investments: Equity delivery provides investors with the time for as long as they plan to hold them. Consider you have purchased shares of ABC company, and the time they are delivered to your DEMAT account, it can be held for as long as the investor wants.
• Passive money: If an investor has some shares or stocks for an extended period, they can earn an income in the form of dividends. Generally, the concept is to hold the position that will be profitable since the price would rise one day, and along with this, investors can earn passive income in the form of dividends.
• Capital appreciation: The idea of capital appreciation is nothing new and challenging to understand; when an investor earns profits over a duration of time, getting the difference between the buying price and selling price of the stock they hold is known as capital appreciation.

More such benefits of delivery based trading:

• Many banks and financial institutions give loans in place on your shares. So, when you face any difficult situation financially, you can please your shares and take on a loan.
• Also, if a company makes a hefty profit, it may announce bonus shares. Let’s assume a company declares a 1:1 bonus; that would mean you can get one share free for every share you hold of the company.

Disadvantages of equity delivery trading:

A few demerits or some common cons of delivery trading:

• Upfront liquidity required: Unlike leverage trading, where the trader does not have to pay the entire cost of trades, delivery trading needs you to pay the total amount upfront. Investors who have less liquidity and wish to trade with heavy volumes usually opt for margin trading over delivery trading. Also, it can mandate you to miss out on profit-making chances if you do not want or cannot pay a large capital upfront.
• High brokerage charges: Many stockbrokers charge high brokerages even for delivery trading. This increases the cost of transaction and lowers the profits that investors make by selling the stocks. 
• Blocking funds: One of the significant delivery trading demerits is blocking funds to buy stocks in delivery trading. As in this case, investors need to pay the entire costs of the stocks upfront, which in a way, would block that specific amount in the shares bought. And investors get the funds back only when they sell the shares.
• High transaction charges: High transaction charges like the STT also add to delivery trading demerits. The securities transaction tax or STT is a direct tax by the Securities and Exchange Board of India or SEBI on the purchase and sale of equities. It is a massive cost for equity delivery investors as the charges are as high as 0.01% on purchase and sale. 

Conclusion:

An investor when taking delivery of his shares in their DEMAT account can hold shares for as long as he wishes, unlike in intraday trading where he has to square off his position by the end of the day. The shares are delivered to the investor’s DEMAT account after the settlement cycle of T+2 days. 

While taking equity delivery, one must also know the various charges one has to bear, apart from the upfront investment amount. Several charges are applicable when an investor buys into shares through equity delivery, including service tax, stamp duty, costs of the depository participant, among others.