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

    Whenever you buy or sell a stock, bond or mutual fund, there are two important dates of which you should always be aware: ... Read Answer >>
  2. 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 ... Read Answer >>
  3. How can I find out what date(s) I am supposed to be entitled to ex-dividends?

    Understand the various dates associated with payment of stock dividends and specifically how the determining ex-dividend ... Read Answer >>
Related Articles
  1. Investing

    What is a Settlement Date?

    A settlement date is the day a security trade must be settled.
  2. Investing

    What's a Maturity Date?

    Maturity date is the final date when any remaining principal and any unpaid interest are due on a debt.
  3. Financial Advisor

    5 Ways to Date on a Budget

    Dating on a budget doesn't have to be boring. Try these 5 tips to find the best dates on a budget.
  4. Investing

    What Do T+1, T+2, and T+3 Mean?

    T+1, T+2, and T+3 denote the day settlement occurs on a transaction.
  5. Financial Advisor

    Target Date Funds Can Be Customized: Here's How

    Target date funds will likely become a permanent fixture in the marketplace for the retirement plan sector. Here's how they have recently improved.
  6. Investing

    What is a Record Date?

    The date established by an issuer of a security for the purpose of determining the holders who are entitled to receive a dividend or distribution.
  7. Investing

    Dissecting Declarations, Ex-Dividends and Record Dates

    Understanding the dates of the dividend payout process can be tricky. We clear up the confusion.
  8. Investing

    The Foundation Of Structured Settlements

    This annuitized payment setup should be arranged through impartial attorneys and tax agents.
  9. Investing

    Explaining the Spot Rate

    The spot rate is the immediate purchase price posted on exchanges for purchasing commodities, currency and securities.
  10. Retirement

    Who Actually Benefits From Target Date Funds?

    This pre-packaged retirement investment option could be the perfect fit for some investors and a downfall for others. Which are you?
RELATED TERMS
  1. Trade Date

    The month, day and year that an order is executed in the market. ...
  2. Transaction Date

    The date upon which a security or other financial instrument ...
  3. Dated Date

    The date at which interest begins to accrue on a fixed-income ...
  4. Trade Date Accounting

    A method company accountants and bookkeepers use to record transactions ...
  5. Settlement Date

    1. The date by which an executed security trade must be settled. ...
  6. Cash Transaction

    A transaction that is settled with cash on the same day as the ...
Hot Definitions
  1. Co-pay

    A type of insurance policy where the insured pays a specified amount of out-of-pocket expenses for health-care services such ...
  2. Protectionism

    Government actions and policies that restrict or restrain international trade, often done with the intent of protecting local ...
  3. Fiduciary

    A fiduciary is a person who acts on behalf of another person, or persons to manage assets.
  4. Demonetization

    Demonetization is the act of stripping a currency unit of its status as legal tender and is necessary whenever there is a ...
  5. Investment

    An asset or item that is purchased with the hope that it will generate income or appreciate in the future. In an economic ...
  6. Redlining

    The unethical practice whereby financial institutions make it extremely difficult or impossible for residents of poor inner-city ...
Trading Center