Last Updated on November 7, 2023 by BFSLTeam BFSLTeam
A Buy and Hold strategy ideally involves an investor purchasing a stock for a long horizon. Traders use this strategy to ride out market volatility. The strategy is widely used by investors who view particular stocks to exhibit substantial returns in the long term and are therefore prepared to face its short-term fluctuations.
Meaning of “Buy”
Investors may carefully select their entry and exit points while preparing a trading strategy. An investor typically buys a stock when there is room for an upward movement. Buy meaning in the stock market is to initiate a position at the appropriate entry point. On the other hand, Hold meaning is to retain the current position in the markets. The buy and hold strategy is used extensively in passive investing, where investors buy and hold stocks for an extended duration, irrespective of market fluctuations.
However, there might be situations where shares are not delivered on time or may not be credited to the buyer’s account altogether. Such cases may result in a buy-in wherein the buyer has to repurchase the shares through an auction process. Let us dig deep into how buy-in works and what forced buy-in means.
The Difference Between a Buy-In and a Forced Buy-In
The terms buy-in and forced buy-in might sound similar. However, the two have vastly different meanings. Let us understand in detail how a buy-in differs from a forced buy-in.
| Characteristics | Buy-in | Forced Buy-in |
| Why does it happen? | A buy-in is an event wherein investors must repurchase shares because either they did not receive delivery of the original shares or the purchased securities were not delivered timely. | A forced buy-in typically occurs to compensate for an open short position. There might also arise situations when the broker may not be able to borrow shares for the short position leading to a forced buy-in. |
| How does it occur? | The Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) follow a buy-in auction process where stock is auctioned to third parties by the exchange. | Sometimes the account holder may not be informed before a forced buy-in. The process may therefore work opposite from a forced liquidation or a forced sale. |
Understanding the process of buy-in stock auction
India’s major exchanges, BSE and NSE, follow the T+2 rolling settlement system, which takes two days to settle a particular day’s trading transactions. The exchange facilitates a buy-in stock auction in case of failure to deliver shares or short deliveries. The auction takes place on the T+2 day, and the auction settlement occurs on the following day, i.e., the T+3 working day.
Brokers participating in the auction submit their bids for the short position. In the case of successful auctions, the defaulting traders have to pay the auction price along with brokerage fees; in some cases, a penalty might also be levied. However, in case of an unsuccessful auction, a full refund is made to the trader who made the initial purchase. The defaulter is obligated to pay the higher amount of (a) The trading day’s highest current market price or (b) 20% more than the previous day’s closing market price for the security.
