If you want to invest in stock markets, you should be aware of the key terminologies involved in stock market trading. Whenever you buy or purchase stocks, they get transferred in your Demat account within the stipulated settlement period. But what happens if the settlement is delayed, or your purchase order is not fulfilled? Well, there is a remedy available in the form of buy-in stocks. Wondering what is buy-in stocks? It is a remedy available to buyers if the seller does not deliver the stocks within time, or does not deliver it at all. In global stock markets, like New York Stock Exchange (NYSE), as part of the buy-in process, the purchasing party can replace the original transaction by instructing a third-party or a buy-in agent to administer the transaction by purchasing and delivering the stocks. Alternatively, the stock exchange can directly allow for repurchase from another seller, after issuing a buy-in notice.
In the Indian context, however, stock exchanges including the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) follow an alternative process of buy-in stock auction, where the exchange auctions the stocks to third-parties at the most competitive rates.
Understanding price difference settlement in context of buy-in stocks definition: The price difference between the price of original transaction and the buy-in purchase (the second transaction or repurchase) is settled between the selling and purchasing parties in the following manner:
Buy-in stocks definition when the price of the second transaction/repurchase is higher than the original transaction: There could well be a situation that the price of the particular stock increased between the original and second transaction. In this case the selling party would compensate the buyer by paying the cost difference.
Buy-in stocks definition when the price of the second transaction/repurchase is lower than the original transaction: There could also be a scenario when the market price of the specific stock plummeted from the date of original transaction. In the case of the buy-in price being lower than the price of original transaction, the cash payments would move in the opposite direction. The purchasing party will now pay the cost difference to the seller.
Buy-in stocks definition in context of the NSE and BSE : Both stock exchanges follow the T+2 (Trading +2) rolling settlement system, where a particular day’s trading transactions are settled within two working days. In the case of failure of delivery, or short deliveries, the stock exchanges provide for buy-in stock auction. The auction is conducted on the T+2 day itself, while the auction settlement is done on the third (T+3) working day.
Benefits of buy-in stock auction vis-vis the buy-in agent framework : The advantage of buy-in stock auction as compared to appointment of third-party agents is that the auction process becomes streamlined and automated. Besides allowing for the entire process to become transparent, it allows for more liquidity to enter the market. The original buyer also receives the most advantageous price. The buy-in agent model is also tedious and more time consuming. Besides, finding an agent can be difficult as there is no legal obligation, whatsoever, to act as an agent.
Understanding the process of buy-in stock auction : Once the concerned stock market intimates about an auction, dealers and brokers participate by placing their bids for the short position. In the case of a successful auction, the trader who defaulted on delivery will have to pay the actual auction price along with brokerage charges. A penalty can also be charged. However, if the auction is unsuccessful, the original purchasing trader gets a complete refund. The original defaulter now has to pay whichever is higher from the two: either the highest existing market price from the trading day or above 20% of the closing market price of the stock on the previous trading day.
Thus, it is important to know key terminologies such as what is buy-in stocks, before starting your investment journey in stock markets. Alongside, it is also important to choose a trusted and reliable broking firm. With a trusted financial partner, you get comprehensive market reports and latest stock updates to answer your queries such as what to buy stock in. Look for features, like 2-in 1 Demat cum trading account along with cutting-edge trading platforms.