What is a CNC Order in Trading in Stock Markets?
The full form of CNC is Cash N Carry and the CNC is used in the Equity Segment of BSE & NSE. It is used for buying or selling shares for delivery. What is delivery? When you buy a stock and hold the stock, it is called delivery. For example, I buy stocks today and I may sell it after two days or ten days or I can even hold the stock for a year and sell it later on…..the point to note here is there is no time limit…this is known as the delivery process.
Now where do the stocks/shares we buy get saved? The shares purchased using the CNC option would be transferred to your Demat account after T + 2 days that is, t-day is the day you buy the stocks plus two more days….now what is Demat account? Demat Account is short for dematerialisation account and this account makes the process of holding investments like shares, bonds, government securities, Mutual Funds, Insurance and ETFs easier, A Demat Account is a bit like a bank account…it’s an electronic account to save your stocks.
Why do we choose MIS?
If it’s intraday trading we choose MIS. If you wana buy today and sell today you can choose MIS and place the order. If you want to take the delivery, we choose CNC…and select the number of stocks, the quantity you need…you can see the market price which is reflected, so you can buy in this market price. Now your trade has been completed through CNC order…now what’s next? After T+ 2days it will reflect your my Demat account…once it reaches your demat account you can choose to sell it. What you need to note here is…when you select the number of quantities/stocks, remember you can buy stocks only based on your available funds. For example, if you have 10,000 rupees…you can buy only for 10,000…however, that’s not how it works in intraday….in intraday we have an exposure limit…even if you have less funds in hand…you can use the exposure limit given by the brokerage firm to buy your stocks.
So when you buy stocks in the market, you need to carefully select if it’s CNC or MIS you want to trade in. Usually, there are two types of traders in the market. There are traders who preplan or pre define their move and select only the delivery option, such traders usually pick the CNC order type. There are those traders who buy stocks in MIS, intraday by taking the exposure limit…and when they incur loss in some stocks …they may decide to convert such stocks…. here is when you need to be vigilant about the markets square off timings….before this you should have completed the conversion process.
Point to note here is that exposure limit is not applicable for CNC order …for MIS we have an exposure limit…even if I have just 10,000 rupees in hand I can buy stocks up to one lac with the exposure limit provided by the firm….but you can use this only in intraday where you buy and sell the same day. But for CNC we can only purchase based on the fund you have in hand. However, you can convert the stocks that you buy from intraday to CNC order. Now how is it done?
For example, you have only 10,000 rupees in your account…now you use your exposure limit of 50,000 and buy some stocks…now at the end of the day you see that some of your stocks have incurred a loss while some you have gained profit…in this scenario you can cut the stocks that you have gained profits…and you could take the stocks in loss and convert to CNC….point to note here is that you can only convert with the margin that you have in hand. If you are in need of more funds at this point you can transfer funds and convert the stocks to CNC. Now remember, the 3.15 pm is the square off time of the market…that is, the intraday positions square off at 3, 15 pm in the market. So before this time you need to either cut your positions or convert to CNC….otherwise your overall position will square off in the market at 3.15, even without your knowledge.
Likewise, there are some mistakes that could happen in CNC order….you can buy and sell or sell and buy right….now when buy and sell it’s not an issue coz you are in charge here as you have the stocks in hand and you can sell whenever you want to…..but selling without having stocks in hand and buying it in intraday is a risky concept. Say for instance, you buy a stock in CNC…now you would get the settlement in your Demat account in T+2 days right…but what if the opponent is not willing to settle or doesn’t settle your amount?...maybe they would have sold without having any stock in hand….in this case the settlement becomes void. At the same time, if you believe that the stocks would get settled in T+2 days, you may sell the stocks after a day …so what happens here? Neither will they be able to make the settlement nor will you be able to make the settlement for the stocks that you have sold. So both parties will have to bear the penalty fee.
Now how is the penalty calculated?
First you need to calculate the particular stocks of the last three days high price…once you have the price…your penalty would be 7% of the price calculated for the last three days. In order to avoid such types of settlement..Let’s say you have sold a stock in intraday. You may think that you could buy the stocks before the market closes and you would have sold without having stocks in hand…now in case the stocks you bought has become upper freeze or lower freeze in the market…maybe the market may close with that freeze…in such cases settlement does not take place. Generally, the A group stocks …the liquid stocks do not face these issues because settlement takes place without much hassle. But in the groups like Z and S…the stocks which are not liquid…there are issues in settlement take place. Usually, in 90 to 95% such settlement issues do not happen…but there’s a two to three percent chances that it may happen. So the important point to note here is that you should sell only after the stock settlement has taken place in your dmat account…otherwise you may end up paying a penalty for lack of settlement.
Now remember that CNC and MIS are indications given to your by the brokers…when you buy a product…before you execute your trade….you need to choose the order type wisely whether you are going to buy in intraday or in CNC……hope you have a fair understanding of CNC order by now….likewise there are lots of benefits in delivery…when you take delivery of stocks in futures…you get benefits like dividends, bonus shares, splits and so on.