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.

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