What You Need To Know About Stock Clearing Houses

What You Need To Know About Stock Clearing Houses

Clearing houses are great to have when making a financial transaction as they make sure your money goes to the correct destination. They are also a great option to keep in mind when looking for a stockbroker because they handle the buying and selling of trades. 

In this post, you’ll learn the basics about clearing houses (also associated with commodities and future markets), what they do, and why they’re important. Let’s begin! 

What is a Stock Clearing House? 

You’ll often come across the term “clearing house” when dealing with stockbrokers. Stock clearing houses are third-party agencies or separate entities that work as a middle man. They streamline the process of sealing a transaction and mitigate any problems that may occur. For example, say you are selling 200 shares of a company to Carly for $20,000. The clearing house makes sure that Carly receives the 200 shares, you receive the $20,000, and that the transaction is recorded.

While their purpose is to reduce risk and increase the stability of the markets they serve, clearing houses themselves run a very large risk. They act as both a buyer and a seller. So if either party in the transaction defaults, the clearing house is on the hook. Because of this, they often require a minimum account balance before working with an institution in the case that the account doesn’t have enough money to close the deal. 

What Do They Do?

A clearing house does many things which are essential to financial markets. Most importantly, they make sure that your money gets to the right destination. They will then report the trade information to both the buyer and sellers to make sure everyone has the transaction details. 

Additional responsibilities may include:

• Settling exchange trade accounts

• Maintaining margin accounts

• Collecting money 

• Overseeing delivery and reporting trading data 

These institutions make the lives of both sellers and buyers easier. In fact, both parties will never have to meet or know each other. The clearing house collects all necessary information and completes the transaction. 

Why Clearing Houses Are Important 

These institutions are so important because they streamline the process of trades. They make financial markets and institutions efficient and lessen the room for error. 

Clearing houses make sure that the trade information is sent to both parties and the exchange. Moreover, they help prevent common transaction problems. By conducting a financial background check of both parties, they make sure that both the buyer and seller are able to hold up their end of the deal. For these reasons, a clearing house gives traders greater confidence in the transaction process, thus contributing to a more liquid market.

As you can see, these third-party agencies have become an essential part of financial markets. Even though Easy Stock Loans is not a broker, we are here for you if you have any questions regarding the stock market. Just give us a call – we are more than happy to discuss your concerns!