Whenever you buy or sell a stock, bond, ETF or mutual fund, there are two important dates you should always be aware of: the transaction date ('T') and the settlement date. The abbreviations T+1, T+2, and T+3 refer to the settlement dates of security transactions that occur on a transaction date plus one day, plus two days, and plus three days, respectively. 'T' is the transaction date.
As its name implies, the transaction date represents the date on which the transaction occurs. For instance, if you buy 100 shares of a stock today, then today is the transaction date. This date doesn't change whatsoever as it will always be the date on which you made the transaction.
However, the settlement date is a little trickier because it represents the time at which ownership is transferred. It's important to understand that this doesn't always occur on the transaction date and varies depending on the type of security with which you are dealing. Treasury bills are about the only security that can be transacted and settled on the same day.
What's the reason behind the delay in the actual settlement?
In the past, security transactions were done manually rather than electronically. Investors would have to wait for the delivery of a particular security, which was in actual certificate form and would not pay until reception. Since delivery times could vary and prices could fluctuate, market regulators set a period of time in which securities and cash must be delivered.
Some years ago, the settlement date for stocks was T+5 or five business days after the transaction date. Until recently, a settlement was set at T+3. Today, it's T+2 (i.e., two business days after the transaction date).
- In order to clear the transfer of a security from a seller to a buyer, it must go through a settlement process, which creates a delay between the time a trade is made ('T') and when it settles.
- Historically, a stock trade could take as much as 5 business days (T+5) to settle a trade.
- Today, with the advent of information technology and electronic trading, most stock trades settle in just 2 business days (T+2).
How to determine when you will actually own the stock or get the money
- If you buy (or sell) a security with a T+2 settlement on Monday, and we assume there are no holidays during the week, the settlement date will be Wednesday, not Tuesday. The T or transaction date is counted as a separate day.
- Not every security will have the same settlement periods. All stocks and most mutual funds are currently T+2; however, bonds and some money market funds will vary between T+1, T+2, and T+3. It's important that you know which it is.
If you buy shares of Microsoft (MSFT) on Friday, June 2, 2017, while your broker would debit your account for the total cost of the investment immediately after your order is filled, your status as a shareholder of Microsoft will not be settled in the company's record books until Tuesday, June 6, 2017. Therefore, the settlement date is the date in which you become a shareholder of record. Note that weekends and public holidays are not included. In this case, if Monday was a public holiday, the settlement date would be Wednesday, June 7, 2017.
Knowing the settlement date of a stock is important for investors or strategic traders who are interested in dividend-paying companies.