It is widely known that information is key if you are a stock market trader or investor. Equally important is a thorough understanding of how stock markets function. The Indian stock market has different segments such as the rolling settlement segment, the institutional segment, the approved foreign investor segment, and the trade-to-trade segment. Trade-to-trade stocks, also known as T2T stocks or T2T shares, are securities that must be delivered in order for dealing to go through (T+2 payment). These stocks can’t be bought and sold during the day or using the Buy Today, Sell Tomorrow (BTST) strategy. As soon as you buy a T2T share or stock, you can only sell it once the T+2 payment is done. Your order will be turned down if you try to sell these stocks on the same day or before they are delivered to your account.
What is the T2T stock segment?
Now that you know what is T2T stock, let’s understand what the T2T stock segment is. The Trade to Trade (T2T) segment is where exchanges move risky stocks that may have had their prices manipulated. It is not possible to trade immediately or BTST in the T2T area because all deals must be fulfilled.
What are trade-to-trade (T2T) stocks?
Exchanges monitor stocks whose prices fluctuate widely or are highly unstable. Part of the process involves the market regulator SEBI, which helps put the stock into the correct category. Accordingly, highly risky stocks are moved to the T2T segment so that small buyers don’t have to deal with them. The segment also stops people from speculating on these stocks for no reason.
Exchanges shift equities into and out of the trade-to-trade stock sector every two weeks based on their quarterly reviews. A stock may be moved to the T2T segment for a number of reasons, such as an overvalued price-to-earnings ratio, price instability, or a drastic fall in market capitalization. Furthermore, assets that are not allowed to be traded in the F&O segment could also be moved to the T2T segment.
Criteria for shifting a stock to the trade-to-trade stock segment (T2T)
Exchanges divide stocks into different classes based on the type of instrument and payment. T2T stocks is a standalone category. To see a list of these stocks, go to the NSE and BSE websites. Here are some of the criteria used to move stocks to the Trade-to-Trade segment.
P/E of the stock
P/E overvaluation is one of the main reasons why shares are moved to the Trade-to-Trade stock segment. In the case of BSE, if the Sensex P/E is between 15 and 20, and if the stock’s P/E is more than 30, it might be time to move it to T2T. Earnings Per Share (EPS) from the last four quarters will be used to calculate the P/E.
Market cap
The next factor is how much money the stock is worth in the market. If the market cap goes below Rs. 500 crore, moving to the T2T segment will be considered. The idea is to keep an eye on small-cap stocks.
Trading volume
Lack of liquidity and price fluctuations can be signs of low trade traffic. Stocks that don’t trade very often could be moved to the T2T segment to stop price trickery that goes too far. By doing this, exchanges try to keep the market intact and protect buyers from sudden, mysterious price changes that can happen in stocks that are not traded often.
Volatility
Another reason to move stocks to the T2T segment is volatility. Stocks whose prices change a lot in a short time may be moved to the T2T segment to curb risky dealing and ensure that prices move steadily. Understanding what is T2T stock helps to keep trade fair by reducing the impact of sudden and unpredictable price changes.
How frequently are stocks moved to the T2T segment?
Trade-to-trade stocks have to be delivered (T+2) before they can be bought or sold. Because of this, immediate position clearing is not allowed in T2T stocks as it can lead to more speculation. You can sell trade-to-trade stocks that you bought today after the T+2 settlement is over. You can’t sell these stocks within 24 hours of receiving them or before. The Trade-to-Trade (T2T) segment undergoes two significant reviews every two weeks and every three months.
- The Quarterly Review is to identify stocks that are exiting the T2T sector.
- The Fortnightly Review is used to find stocks that are going into the T2T segment.
These reviews are for all assets, no matter what price range they are in. In order to keep things stable, a ±5% price filter band is also used to revise price bands upward. Traders need to be aware of these review processes as they impact how stocks are moved to the trade-to-trade stock market and how volatile they are.
Example of a T2T trade
To understand how T2T stocks work, let’s look at an example. Let’s say you want to trade in the stock of a company. The stock exchange has marked this company as a Trade-to-Trade stock. The market price is Rs. 550 per share. As you think the stock price will go up, you choose to buy 100 shares of the company. You need to pay Rs. 55,000 (Rs. 550 X 100 shares) to buy the stock.
You bought 100 shares, but they won’t show up in your demat account until the end of the next day because the Indian stock market uses the T+1 trade closure cycle. Once these shares are added to your demat account, you can sell them. The exchange will reject your sell order right away if you try to put it in before the shares are paid for.
Things to remember while trading in T2T stocks
When you trade in T2T stocks, you need to understand the rules thoroughly and what T2T stocks mean. It is essential to know that trade during the day is not allowed in the T2T segment. When investors settle deals, they either take or give delivery of shares. This means they need to have enough money or shares in their account to close the deal.
- Another critical factor is the possible effect on cash. Trade-to-trade stocks have to be delivered, so there may be fewer trades than in other sectors. This can make it harder to buy and sell shares, and it could widen the bid-ask gap.
- They should also know about the settling stage. The T2T segment uses the standard T+2 cycle for settlement, which means that trades are closed two business days after the deal’s date. It’s essential to make plans ahead of time and make sure you have the money or shares you need for payment.
- Lastly, buyers should consider the extra fees they will have to pay to trade Trade-to-Trade stocks. Because every trade has to lead to a natural delivery, the fees for exchange, transaction charges, and taxes may be higher than for immediate deals. These extra costs should be taken into account in the trade plan to ensure it makes money.
Stocks can be moved to and from the trade-to-trade stock segment, just like they can be moved to and from the standard segment. Every exchange does this as part of its review process every three months with the help of the market regulator. In the NSE Trade-to-Trade sector, shares can be bought and sold under the BE or Book Entry series.
How to trade in the T2T segment?
Before you can trade T2T segment stocks, you need to know what they mean and what limits SEBI imposes on them.
- Finding T2T stocks: The NSE and BSE list T2T segment stocks in different ways. The NSE lists T2T stocks as BE Series Stocks, while the BSE lists them as T Group Stocks.
- No Intraday Trading of T2T stocks: Purchasing and selling T2T stocks on the same day is not allowed. Following the settlement cycle set out under SEBI rules, every buy or sell order leads to a settlement.
- Margins and fines: Before trading in T2T stocks, traders must ensure that they have enough margins and the goal shares in their demat account to avoid penalties. If they don’t give their shares by the settlement date, they may have to pay a big fine.
- Must Deliver T2T stocks: All trades in T2T stocks must result in delivery. Because of this, buyers need to receive the shares they received in their demat account.
- Settlement Cycle: The Indian stock markets are heading toward a settlement cycle of T+0 (beta version), but T2T stocks have a rolling settlement cycle of T+1 days. The demat account must be charged with shares bought by the next business day after the trade date, and the demat account must be debited with shares sold by the same period.
Conclusion
You now know what T2T stocks mean. If you want to trade in this segment, you can use some tips mentioned above. When dealing in stocks that are thought to be highly risky or controlled, you should be very careful because markets usually label these stocks as T2T assets.
Whether you’re buying or selling T2T stocks, you should have a complete risk management plan ready. If the market goes against what you expected, you should limit the size of your account and put in place proper stop-loss orders to limit the loss. Remember to plan your trades well ahead of time as you can only sell these stocks once they’re delivered to your demat account.
