What do T+1, T+2 and T+3 mean?

By Investopedia Staff AAA
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. How does the risk of investing in the electronics sector compare to the broader market?

    Learn how the electronics sector's risk compares to the broader market; discover real-world examples of how high exposure ...
  2. How do markets account for systematic risk?

    Find out how market participants deal with systematic risk, or the kind of market risk that cannot be diversified away through ...
  3. What stage of the economic cycle is usually the best for an investor to enter the ...

    Learn how savvy investors employ sector rotation to gain from the electronics sector during expansion and avoid losses during ...
  4. How do S&P 500 futures work?

    Learn about the mechanics of S&P 500 futures contracts, a type of stock index future introduced by the Chicago Mercantile ...
RELATED TERMS
  1. Dividend

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

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

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

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

    A corporate action in which a company buys most, if not all, ...
  6. International Finance Corporation

    The International Finance Corporation is an organization dedicated ...

You May Also Like

Related Articles
  1. Stock Analysis

    The World's Top Ten News Companies

  2. Forex

    What Is Online Trading Academy?

  3. Investing Basics

    Why did Berkshire Hathaway create Class ...

  4. Stock Analysis

    Buyinb Facebook Stock, A Beginner's ...

  5. Investing News

    Alibaba's Top Competitors

Trading Center