What are Trade to Trade (T2T) Stocks? How to Invest in Them?
The equity market, or what people commonly refer to as the stock market, has a number of segments as per Securities and Exchange Board of India (SEBI) regulations. It has sub-segments like rolling settlement, institution settlement, Qualified Foreign Investor (QFI), trade-to-trade and more. Of this, stocks in the trade-to-trade segment, called T2T stocks, are kept to prevent erratic price movements.
This blog will discuss what trade-to-trade stock means in detail. Keep scrolling to know more!
What Is a T2T Stock?
Trade-to-Trade (T2T) stocks represent a segment where all purchases or sales must result in mandatory delivery. This means that SEBI will not permit intraday position squaring for T2T stocks as it may increase speculation in these stocks. In other words, any T2T stocks you buy get credited to your Demat account and vice versa.
When you open the “Notice” pages of National Stock Exchange (NSE) or Bombay Stock Exchange (BSE), you will see a list of companies that they have transferred to the Trade-to-Trade segment. This is the T2T sub-segment of the stock market. Stock exchanges will transfer shares to this segment after consultations with the market regulator SEBI.
They decide to move stocks to this T2T segment so that it would curb unnecessary speculation in such equities. SEBI is always wary of volatile stocks as retail investors usually get caught in unpredictable price fluctuations, potentially leading to massive losses.
In short, trade-to-trade stocks are:
- Stocks that traders must deliver upon purchase or sale
- Securities settled on a gross basis rather than a net basis
- Extremely speculative or suspected price manipulation
- Shares that cannot be squared off since traders cannot trade them intraday
- Delivered after the trader pays in full
- Stocks to be delivered separately
What Are the Criteria for Identifying Stocks in the T2T Segment?
The BSE and NSE can only transfer shares to the T2T segment if they are unavailable for trade in the Futures and Options (F&O) or derivatives segment. As a result, one cannot move shares available for F&O trading to the T2T section.
Usually, SEBI and stock exchanges transfer shares to the T2T segment on a biweekly basis. Every quarter, these stock exchanges assess stocks in this segment and make the decision to transfer such stocks. This decision is based on three factors, all of which need to be fulfilled. These factors are:
1. P/E Overvaluation
Suppose Nifty’s P/E multiple is about 20-25, and the stock under consideration has a P/E multiple of 50. In such a case, the NSE will regard it as overvalued. Depending on the other two factors, NSE may reclassify these expensive stocks as T2T.
2. Price variation
The NSE or BSE will consider a stock for transfer to the T2T section if its price variation is roughly 25% more than the Sensex or the stock’s benchmark index. Furthermore, this variation has to move in Sensex’s direction.
3. Market capitalisation
A stock may be considered for inclusion in the T2T category if its market capitalisation is less than Rs. 500 crore. SEBI will not allow intraday trading on such securities, except for new Initial Public Offering (IPOs), as it might lead to significant stock volatility, price manipulation and capital erosion.
Furthermore, the BSE and NSE may transfer companies to the T2T from the regular segment, just as they can transfer them back to the regular segment. This decision to move between segments is based on an exchanges’ quarterly assessment, which they carry out with SEBI’s assistance.
Both these exchanges permit only delivery trades in such stocks and do not allow Buy Today Sell Tomorrow (BTST), Sell Today Buy Tomorrow (STBT), or intraday trades.
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Also Read: Meme Stocks – History, Working, Pros and Cons
How to Trade in the T2T Segment?
If you wish to buy or sell trade-to-trade stocks, then you should follow the steps below:
- You need to ensure to take delivery of the stocks and pay the required amount. If you fail to pay the required amount within the trading day, the seller will recover losses from your account. Additional penalties are applicable.
- After you sell these shares, the exchanges will not allow you any netting off or intraday for the T2T share.
- Sellers should check if they have the stock in their respective Demat accounts. They will need to deliver the stocks within T+2 days. Otherwise, these shares will go into auction, and the seller will incur losses. Additionally, the exchange will also penalise his/her broker.
- Furthermore, there is no facility of buying today and selling tomorrow and selling today and buying tomorrow in this segment, so you should pay and deliver everything on time.
What Is an Example of Trade to Trade?
Suppose a trader purchases 5,000 shares of ABC bank in standard market conditions, and the price of each of these shares is Rs. 19. This trader then sells those shares on the same day that he purchased them at Rs. 20 each. As a result of intraday price differences, he has managed to make a profit of Rs. 5,000.
If the ABC Bank shares were in the T2T segment, the same trader would have to pay Rs. 95,000 to a broker to deliver shares. The trader would not be able to sell these shares until and unless he gets the delivery in the Demat account. This is why he will not be able to make an intraday profit.
What if the Trade Gets Cancelled?
SEBI penalises a trader if a deal is done in the T2T segment and the clearing member cancels it. There is a Rs. 1,000 cancellation penalty. However, if the clearing member is present in both buying and selling for this cancelled trade, the SEBI will charge the member a penalty of Rs. 2,000.
If the member cannot settle the trade, he is obligated to obtain NSE Clearing Limited’s (NSSCL) prior approval before asking for an extension of the settlement date.
Also Read: What are FAANG Stocks and How Can You Invest in Them?
If you are a trader and wish to trade in the T2T segment, below are certain things that you as an investor should keep in mind:
- When you purchase a share in the T2T sector, you must accept delivery of the share and make full payment by the end of the day (EOD). If you do not pay by EOD, both the broker and exchange will charge you a penalty.
- Before selling a T2T stock, you need to make sure you have it delivered to your Demat account. If you do not have the delivery in time, the broker and exchange will cancel your order. In addition to the penalties, your losses could be considerable if the exchanges sell your shares at auction.
- Before executing a trade, many brokers will inform you that SEBI and both exchanges do not allow intraday trading in these equities. However, covering your position could result in significant losses if you accidentally purchase a T2T share.
- The circuit measurements are set at (+/-)5% when equities are moved to the T2T category. SEBI’s main goal in doing this is to lessen the volatility of shares and keep them at a certain level.
- These days, BTST and STBT transactions are popular among traders. However, SEBI and the exchanges prohibit this in the T2T category. BTST or STBT trading is not feasible because trades in this category always result in the delivery of shares.
Final Word
Most traders might find the T2T segment complicated, but it offers a lot of benefits for small investors. If you ever decide to invest in T2T stocks, this segment will protect you from erratic price fluctuations. Furthermore, this segment also protects the investors’ shares from excessive speculation.
FAQs
Ans: T2T segment is a stock segment in an exchange like the BSE and NSE where investors can trade shares based on delivery. In this segment, investors cannot participate in intraday trading of the stocks. The delivery of stocks is not taken on the same day in the T2T segment.
Ans: If you search the Notice section of NSE and BSE, you will find the T2T stocks list, where you might find some companies like:
• Alpha Drugs
• India Foils
• Blue Bird
• Jeypore Sugar
• Jyothi Infra
Ans: Both the stock exchanges need to consult SEBI before transferring shares under the T2T segment. They are not allowed to take any independent decisions in this matter as SEBI is a regulatory body for commodities and securities markets in India.
Ans: Since the stock market does not permit intraday trading on the same, T2T stocks have lower liquidity levels than conventional categories. Many investors prefer to avoid investing in this segment due to its high risks.
Ans: No, Z-group stocks are very different from T2T stocks as they have broken the listing agreement. As a result of having broken listing agreements, these types of stocks are classified as Z stocks. On the contrary, T2T stocks could be much safer to invest in.
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This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
