Cash Settlement in Trading

03 Jul 2025

JM Financial Services

Cash settlement in stock market trading without share delivery

When you buy or sell shares in the stock market, your trade doesn’t actually get "completed" the moment you click the button. That’s where settlement comes in—and if you're not taking delivery of shares, you're probably dealing with something called cash settlement.

Let’s break it down in simple terms.

What Is Cash Settlement?

Cash settlement is a method of settling a trade where, instead of delivering actual shares (or receiving them), you settle the transaction by paying or receiving the monetary difference—in cash.

It is most commonly used in:

Futures & options contracts
Intraday trades
Certain index derivatives and ETFs

🧾 How Does It Work?

Let’s say you enter into a futures contract to buy 100 shares of XYZ Ltd. at ₹500 each. But on the contract expiry date, the stock is trading at ₹520.

Here’s how it works:

You don't get the actual shares.
Instead, the seller pays you the profit:
₹520 - ₹500 = ₹20 × 100 shares = ₹2,000
This ₹2,000 is credited to your account—this is cash settlement.

If the stock had dropped to ₹480, you would pay ₹2,000 instead.

🧮 Cash Settlement vs. Physical Settlement

Feature	Cash Settlement	Physical Settlement
Delivery of shares	No	Yes
Settlement type	Only difference in cash is paid	Actual shares/money are exchanged
Used in	F&O, Intraday, Some ETFs	Equity delivery-based trades
Speed	Faster	Slower (requires share transfer)

📅 T+1 Settlement Cycle

For regular equity trades in India, the stock market now follows the T+1 settlement cycle, where:

T = trade date
Shares and money are exchanged the next day (T+1)

But in cash settlement, there's no actual exchange of securities. It’s settled by crediting or debiting your trading account with the gain or loss amount.

💼 Where Is Cash Settlement Commonly Used?

✅ 1. Futures and Options (F&O)

Most F&O contracts are cash-settled at expiry.
Only select stocks and indices go through physical settlement.

✅ 2. Intraday Trading

You buy and sell shares on the same day.
No delivery happens—only profit or loss is booked and settled in cash.

✅ 3. Index Derivatives

Since you can’t take delivery of an index like Nifty 50, it’s always settled in cash.

🛡️ Regulatory Guidelines in India

The SEBI (Securities and Exchange Board of India) mandates physical settlement for certain equity F&O contracts, but allows cash settlement for:

Index futures and options
Non-stock-based derivatives
Intraday positions closed before market close

🧠 Key Points to Remember

No ownership of shares changes hands in cash settlement.
Profit or loss is settled in your broker’s ledger via bank or margin account.
Brokerage, taxes, and charges still apply.

📊 Example of Cash Settlement in Intraday

Imagine you buy 50 shares of TCS at ₹3,500 in the morning and sell them at ₹3,520 by the afternoon.

Net gain = ₹20 × 50 = ₹1,000
After deducting brokerage, STT, and GST, the remaining profit is settled as cash in your trading account.

No shares are delivered—you simply pocket the difference.

🧾 Final Thoughts

Cash settlement is a fast and efficient way to settle trades, especially when physical delivery of shares isn’t practical or required. Whether you’re trading derivatives, doing intraday, or speculating on price movement, understanding how cash settlement works helps you plan better, reduce risk, and avoid surprises.

Q1. What is cash settlement in the share market?

Cash settlement is a process where traders don’t exchange actual shares, but instead settle the difference between the buy and sell price in cash. It is common in intraday and derivatives trading.

Q2. How is cash settlement different from physical settlement?

In physical settlement, actual shares are delivered, while in cash settlement, only the profit or loss is adjusted in cash. Cash settlement is faster and more common in speculative trades.

Q3. Where is cash settlement used in trading?

Cash settlement is primarily used in: