When you visit the Notices section on the websites of the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE), you will find that a few stocks have been moved to the Trade to Trade (T2T) segment. The stock exchanges take this decision under the guidance of the market regulator – the Securities and Exchange Board of India (SEBI).
But did you know the T2T meaning in the share market and why some stocks are moved to this segment? It is typically done to protect investors from highly volatile stocks and maintain fairness in the stock markets. However, this concept has often been overlooked or misunderstood by rookie investors.
This blog explains everything you need to know about the T2T segment in the stock markets, including what it is, why it exists, its implications for investors, whether T2T stocks are good or bad, and how to become a successful trader in this segment. Keep reading.
What is the T2T segment?
The T2T segment in the stock market contains an exclusive category of stocks that you can purchase only in delivery mode. It means that these stocks are not available for intraday trading.
When you buy shares of a company classified under the T2T segment, you cannot sell them on the same day. These shares are delivered to your Demat account, and subsequently, when you sell them, you must own them in your account before placing a sell order. The stocks placed under the T2T segment are known as T2T stocks.
Why Are Stocks Moved to the T2T Segment?
After knowing what trade-to-trade stocks are, you must be thinking when the trade-to-trade segment takes place. Stocks are moved in the T2T segment primarily to control speculation and volatility. Regulatory bodies like SEBI and the stock exchanges monitor trading patterns, and if they observe excessive volatility or speculative activity, they may move stock into the T2T segment.
Typically, the stocks of smaller companies or penny stocks are more likely to be placed in this segment. These stocks often witness sharp price movements due to speculative trading, which can lead to artificially inflated prices.
To help you understand better, below are the usual criteria for shifting stock to the T2T segment:
The Price-to-Earnings Ratio (P/E)
One of the key factors for moving shares to the T2T segment is overvaluation based on the Price-to-Earnings (P/E) ratio. The P/E ratio is calculated by dividing the stock’s price by the earning per share (EPS). It helps investors and regulatory bodies determine if a stock is fairly priced, undervalued, or overvalued.
For example, if a stock listed on the BSE has a P/E ratio of 20, but the Sensex P/E ratio is around 10, the exchange might consider moving the stock to the T2T segment.
Market Capitalisation
Another key criterion for moving a stock to the T2T segment is its market capitalisation. It refers to the total value of a company’s outstanding shares on a given date. It is calculated by multiplying the stock’s current market price by the total number of outstanding stocks.
If a company’s market capitalisation drops below Rs. 500 crores, the market regulator may consider transferring it to the T2T segment. The goal is to limit speculation in stocks vulnerable to price manipulation due to their smaller sizes. Initial public offerings (IPOs) are generally exempt from these T2T regulations.
Price Volatility
The third but probably the most crucial criterion for moving stock to the T2T segment is price volatility. If a stock witnesses wild price swings over consecutive trading sessions, the market regulator and the exchanges might consider moving it to the T2T segment. Similarly, if a stock hits the upper or lower circuit for consecutive trading sessions, it might be considered for transfer to the T2T segment.
How to Trade in the T2T Segment?
Another common question investors ask is, how to trade in T2T stocks. Demat account opening is one of the first steps to trading in T2T stocks, which are exclusively available for delivery trading. Having a Demat account is vital for holding your purchased shares and ensuring a smooth transaction experience.
The trading process is the same irrespective of whether a stock is in the T2T segment or the regular market segment. Several stockbrokers in India offer online trading apps for stock trading. You can use these trading platform to place buy or sell orders for T2T stocks on the exchanges.
However, there are a few things that you must keep in mind while trading in the T2T segment with even the best trading app:
Since intraday trading is not allowed in T2T stocks, you can only buy these stocks in the delivery mode. It means that you must pay the full amount at the time of purchase.
You can sell these stocks only when you have them in your Demat account. As per the current SEBI rules, the stock exchanges follow T+2 settlement rules for transferring stocks to the investors’ Demat accounts. If you try to sell T2T stocks before the T+2 settlement, your orders will be refused by the exchange.
You cannot short-sell stocks in the T2T segment. Short selling involves selling shares that you don’t own, with the expectation of buying them back at a lower price.
You must enable the delivery instruction through DDPI in your Demat account before trading in T2T stocks. If it is not enabled, you may fail to take the delivery of stocks and this may result in a penalty.
Are T2T Stocks Good or Bad?
There can be no concrete answer to this question. You can analyse the pros and cons of T2T stocks to arrive at a conclusion.
Pros of T2T Stocks
Protection for Investors
T2T offers a safeguard against speculative trading and artificial price inflation.
Focus on Fundamentals
Since intraday trading is not allowed, T2T stocks tend to reflect their true fundamental value over time.
Prevent Over-leveraging
Investors cannot over-leverage their positions in these stocks, reducing the risk of market crashes due to speculative bubbles.
Promote Delivery Trading
One of the advantages of T2T stocks is that they promote delivery trading, which can help mitigate the risks associated with high volatility and speculation
Cons of T2T Stocks
Lack of Liquidity
Since T2T stocks have lower trading volumes, it may be difficult to quickly buy or sell large quantities of shares.
No Short-selling or Intraday Trading
Intraday trading or short selling is not allowed. This is the reason why T2T stocks cannot be sold on the same trading day.
High Volatility
Although T2T limits speculation, the underlying stocks are still volatile, and you must be cautious.
Conclusion
The Trade-to-Trade (T2T) segment is an important regulatory measure designed to control speculation and ensure that stock prices reflect their fundamental value. While it limits certain trading activities like intraday trading and short selling, it provides a safer environment for those interested in long-term gains.
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