Securities Transactions - Settling Transactions In The Secondary Market

In the secondary market, securities transactions can be settled in other ways:

  • Regular-way (RW) trades settle on the third business day after the transaction. That is, if you buy a stock for a client on a Tuesday, you must have the cash to pay for it by Friday; similarly, the investor selling the stock must have it ready for good delivery by that Friday.

  • Ex-dividend trades relate to stocks upon which a dividend has been declared but not yet distributed. When an investor buys on and after the ex-dividend date, or ex-date, he is not entitled to receive the dividend, and the terms of the trade are said to be ex-dividend. For most dividends, the ex-date is two business days before the record date, the day on which the company's transfer agent compiles a list of those persons with shares registered in their names. Notice of the declaration of a dividend must be received at least 10 calendar days prior to the record date. The payable date is the day on which the distribution will be mailed or electronically credited to the registered holders.

A timeline of the various dates looks like this:

Bear in mind that this timeline refers to business days. Weekends and exchange holidays are excluded.

  • Ex-rights trades are similar to ex-dividend trades, except the distribution under consideration is the right to buy additional stock at a discount, rather than a dividend.

  • Due bill trades are used to bridge ex-dates. Suppose you buy a stock for your client seven days after the dividend is declared, and both you and the seller intend for the dividend payment to trade along with the stock. By the time the trade settles, though, the ex-date will have come and gone, and the dividend check is going to be mailed to the seller, not to your client. The easiest way to solve this is to have the seller send you a due bill, a type of promissory note, for the amount of the dividend. Alternately, the seller could send a due bill check, which is an actual cash-equivalent bank draft.

In a cash trade, delivery occurs on the day of the trade. At the seller's option, the parties can take anywhere from three to 60 business days to deliver.

Settlement Rules
Related Articles
  1. Professionals

    5 Reasons Financial Advisors Still Choose Mutual Funds

    Take a look at five primary reasons why financial advisors still choose to recommend mutual funds over other types of investment vehicles.
  2. Brokers

    Broker-Dealer Industry 101: The Landscape

    Independent broker-dealers are a great choice for experienced, self-starter planners who have established practices.
  3. Personal Finance

    RIAs and Brokers: What's the Difference?

    RIAs and brokers are held to different standards when providing investment advice. Here's how they differ.
  4. Trading Systems & Software

    Steps to Starting Up an Independent Broker Dealer

    Launching your own broker-dealer is a lot of work, but the potential payoff is great, both personally and financially.
  5. Professionals

    How To Answer Option Questions On The Series 7 Exam

    Learn how to answer option questions on the Series 7 exam. Pass your Series 7 exam with the help of these tips.
  6. Professionals

    Series 55

    FINRA Series 55 Exam Guide
  7. Professionals

    Series 62

    FINRA Series 62 Exam Guide
  8. Professionals

    Series 99

    FINRA/NASAA Series 99 Exam Guide
  9. Professionals

    Series 65

    FINRA/NASAA Series 65 Exam Guide
  10. Professionals

    Series 66

    FINRA/NASAA Series 66 Exam Guide
  1. No results found.
  1. Do financial advisors need to pass the Series 7 exam?

    The exact nature of a financial advisor's job responsibilities determines whether he must have a Series 7 license. If a financial ... Read Full Answer >>
  2. Do financial advisors have to be licensed?

    Financial advisors must possess various securities licenses in order to sell investment products. The specific products an ... Read Full Answer >>
  3. What are the differences between the Series 6 exam and the Series 7 exam?

    The Financial Industry Regulatory Authority (FINRA) offers a variety of licenses that must be obtained before conducting ... Read Full Answer >>
Hot Definitions
  1. Quick Ratio

    The quick ratio is an indicator of a company’s short-term liquidity. The quick ratio measures a company’s ability to meet ...
  2. Black Tuesday

    October 29, 1929, when the DJIA fell 12% - one of the largest one-day drops in stock market history. More than 16 million ...
  3. Black Monday

    October 19, 1987, when the Dow Jones Industrial Average (DJIA) lost almost 22% in a single day. That event marked the beginning ...
  4. Monetary Policy

    Monetary policy is the actions of a central bank, currency board or other regulatory committee that determine the size and ...
  5. Indemnity

    Indemnity is compensation for damages or loss. Indemnity in the legal sense may also refer to an exemption from liability ...
  6. Discount Bond

    A bond that is issued for less than its par (or face) value, or a bond currently trading for less than its par value in the ...
Trading Center