A:

Whenever you buy or sell a stock, bond or mutual fund, there are two important dates of which you should always be aware: the transaction date and the settlement date. The abbreviations T+1, T+2, and T+3 refer to the settlement date of security transactions and denote that the settlement occurs on a transaction date plus one day, plus two days, and plus three days.

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 refers to the date on which ownership of the security is actually transferred and money is exchanged between buyer and seller. Now, 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 this delay in 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. Today it's T+3, or three business days after the transaction date.

Here are two things you need to know to determine when you will actually own the stock or get the money:

  1. If you buy (or sell) a security with a T+3 settlement on Monday, and we assume there are no holidays during the week, the settlement date will be Thursday, not Wednesday. The T or transaction date is counted as a separate day.
  2. Not every security will have the same settlement periods. All stocks and most mutual funds are currently T+3; 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.

RELATED FAQS

  1. When is a share purchase marked as 'settled' by a brokerage?

    Understand the process of purchasing stock, including ordering, clearing and settlement, and learn when a stock trade is ...
  2. Under what circumstances would someone enter into a repurchase agreement?

    Learn when investors want to enter into a repurchase agreement, such as to gain quick access to liquidity and enjoy flexibility ...
  3. Is there a way to include intangible assets in book-to-market ratio calculations?

    Find out more about the book-to-market ratio and how to calculate a public company's book-to-market ratio including its intangible ...
  4. What types of corporations would be expected to have higher growth rates than more ...

    Understand factors that contribute to certain corporations growing at higher rates than other corporations to the benefit ...
RELATED TERMS
  1. Valium Picnic

    A market holiday or a slow trading day.
  2. Dividend

    A distribution of a portion of a company's earnings, decided ...
  3. Einhorn Effect

    The sharp drop in a publicly traded company’s share price that ...
  4. Institutional Ownership

    The amount of a company’s available stock owned by mutual or ...
  5. Market Value

    The price an asset would fetch in the marketplace. Market value ...
  6. Acquisition

    A corporate action in which a company buys most, if not all, ...

You May Also Like

Related Articles
  1. Brokers

    When is a share purchase marked as 'settled' ...

  2. Stock Analysis

    3 Stocks To Buy and Hold For the Rest ...

  3. Investing

    Top Reasons Stock Indices Could Be Biased

  4. Trading Strategies

    Why There's No Such Thing As A Stock ...

  5. Investing

    Why Do Companies Choose NASDAQ for Their ...

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!