Do I own a stock as of the trade date or the settlement date?

By Chad Langager AAA
A:

When it comes to buying shares, there are two key dates involved in the transaction. The first date is the trade date, which is simply the date that the order is executed in the market. The second date is the settlement date, at which time the transfer of shares is made between the two parties. It is the settlement date, however, that marks an official transfer of ownership from the seller to the buyer. While there may be differing rules for the various jurisdictions around the world, the general view is that ownership is transferred when the funds are given in exchange for the security, which happens on the settlement date.

However, there is little differentiation between the two dates because it is unlikely that ownership will not be transferred after the trade date. Upon the execution of the order on the trade date, an obligation arises for both of the parties involved in the order. The buyer is then obligated to provide the necessary funds (cash) to pay the seller and the seller is obligated to have the adequate number of shares to transfer to the owner. Nevertheless, there are two ways in which the settlement can fail. The first is a long fail, a situation in which the buyer does not have adequate funds to pay for the shares he or she ordered. A short fail can also occur; this is when the seller does not have the security at the settlement date.

The amount of time between the trade date and the settlement date differs from one security to another. This is due to different settlement conventions. For bank certificates of deposit (CDs) and commercial paper, the settlement date is the same day as the trade (or transaction) date. Mutual funds and options are settled one day after the trade date, while U.S. Treasuries will often be settled the following day. The settlement date for foreign exchange spot transactions occurs two days after the trade date; equities (stock) and municipal bonds take the longest and are settled three days after the initial transaction.

To read more, see The Nitty-Gritty Of Executing A Trade.

RELATED FAQS

  1. What is the difference between a short position and a short sale?

    Learn how short selling and short positioning are different, specifically in regards to the nature of the commodity being ...
  2. Are there any risks involved in trading put options through a traditional broker?

    Explore put option trading and different put option strategies. Learn the difference between traditional, online and direct ...
  3. What is a volatility smile?

    Discover what options traders mean when they refer to a "volatility smile," and learn why a volatility smile's existence ...
  4. Is short selling ethical?

    Understand the concept and practice of short selling, and examine the ethical questions that some investors raise in regard ...
RELATED TERMS
  1. Multibank Holding Company

    A company that owns or controls two or more banks. Mutlibank ...
  2. Short Put

    A type of strategy regarding a put option, which is a contract ...
  3. Wingspread

    To maximize potential returns for certain levels of risk (while ...
  4. Volatility Smile

    A u-shaped pattern that develops when an option’s implied volatility ...
  5. Nadex

    Nadex stands for the North American Derivatives Exchange, a regulated ...
  6. Exchange-Traded Binary Options

    Exchange-traded binary options, regulated by the CFTC, let you ...

You May Also Like

Related Articles
  1. Options & Futures

    Options -- Accessing Stakes In Apple ...

  2. Options & Futures

    These Are The Top Brokerage Firms For ...

  3. Options & Futures

    Apple As An Example Of How a Protective ...

  4. Options & Futures

    Apple As An Example Of How to Use a ...

  5. Options & Futures

    The Smartest Strategies For Trading ...

Trading Center