What are T2T Stocks and How do they Work
Trade-to-trade stocks, or T2T stocks, are special in the Indian stock market. Their unique trading rules set them apart from ordinary stocks. You are not permitted to purchase and sell T2T stocks on the same day. The purpose of this limitation is to deter speculative, quick trading. You have to wait for the shares to be credited to your account after buying T2T equities; this usually takes a few days. Through this process, the emphasis is shifted from producing rapid profits to investing with greater deliberation and deliberateness.
Rules to Trade in T2T Stock
| Rule | Explanation |
| Compulsory Delivery | Every trade in T2T stocks must result in the actual delivery of stocks. This means you can't sell the stock on the same day you buy it. |
| No Intraday Trading | Intraday trading, which involves buying and selling stocks on the same day, is not allowed with T2T stocks. |
| Settlement Period | The settlement of T2T stocks usually takes T+2 days, meaning the transaction is completed two business days after the trade date. |
| No Short Selling | Short selling, where you sell stocks you don't own and buy them back later, is not permitted with T2T stocks. |
| Penalty for Non-Delivery | If you fail to deliver the stocks after selling or fail to accept delivery after buying, you may face penalties. |
| Limited Liquidity | T2T stocks typically have lower liquidity, meaning there are fewer buyers and sellers at any given time. |
| Higher Volatility | These stocks may experience significant price fluctuations within short periods. |
How does T2T Stocks Work
T2T stocks are a special category in the Indian stock market. They have specific rules for trading. So let's break down how Trade-to-Trade (T2T) stocks work in the Indian market:
Compulsory Delivery Rule:
The main feature of T2T stocks is that every trade must end in delivery. This means if you buy these stocks, you can't sell them on the same day. They need to be held until the delivery of shares is completed, usually in two business days (T+2).
Purpose - Reducing Speculation:
The compulsory delivery rule in T2T stocks aims to cut down speculative trading, like intraday trading. This ensures that every trade is properly settled and helps in reducing price manipulation.
Lower Liquidity:
T2T stocks usually have less liquidity compared to regular stocks. The ease with which you can purchase or sell something without altering its price is referred to as liquidity. Because T2T equities cannot be sold instantly, they are less appealing to some traders, resulting in lesser liquidity.
Higher Volatility:
These stocks can have bigger price changes. They are often linked to smaller companies and are traded less frequently, making their prices more volatile. This increases the risk but also the potential for higher returns.
Different Investment Strategy Needed:
Investing in T2T stocks needs extensive research and a different approach than investing in traditional stocks. Because you'll be keeping these stocks for at least a few days, understanding the stock's long-term potential is crucial.
Pros and Cons of T2T Stocks
Pros of T2T Stocks
- Reduced Speculation: T2T stocks are less prone to speculative trading. This is because every transaction requires delivery, which discourages short-term speculative activities.
- Lower Market Manipulation: Since these stocks require compulsory delivery, it's harder for traders to manipulate the market through rapid buying and selling.
- Potential for High Returns: T2T stocks can provide substantial returns, particularly if you buy in cheap firms that may increase in value over time.
- Encourages Long-term Investment: T2T trading encourages a long-term investment attitude, which can be advantageous for investors trying to establish a steady portfolio.
- Transparency in Transactions: The mandatory delivery rule ensures more transparency in transactions, as every trade results in the actual transfer of stock ownership.
Cons of T2T Stocks
- Liquidity Issues: T2T stocks often face liquidity problems, meaning it might be difficult to find buyers or sellers quickly.
- Price Volatility: The prices of these Indian stocks can be highly unpredictable. Their prices may fluctuate dramatically, posing a danger to investors.
- Limited Trading Opportunities: The inability to undertake intraday trading (buying and selling on the same day) limits opportunities for short-term investors.
- Risk of Holding Stocks: Because you must retain the stock until delivery, there is a possibility of price reductions during this holding period, which could result in losses.
- Complexity for New Investors: Because of its specific laws and procedures, new investors may find the T2T segment complex and difficult to manage.
How long does a stock stay in T2T?
A stock can be in the Trade-to-Trade (T2T) segment for any length of time. It stays there until the stock exchange decides to remove it or move it back to the regular trading category.
Why can't I trade T2T stocks intraday?
T2T stocks do not allow intraday trading because each trade must result in the actual transfer of stock, which takes a few days. This guideline is intended to reduce speculative trading.
What ought I look into before purchasing T2T stocks?
Examine the market's performance, the company's financial standing, and any recent developments that could impact the price of its shares. Prior to investing, ascertain your own risk tolerance.