When purchasing shares of a security, there are two key dates involved in the transaction. The first is the trade date, which marks the day an investor places the buy order in the market or on an exchange. The second is the settlement date, which marks the date and time the legal transfer of shares is actually executed between the buyer and seller. The time frame between the trade date and settlement date differs from one security to another, due to varying settlement rules attached to different types of investments. Consider the following timetables:
- For bank certificates of deposit (CDs) and commercial paper, the settlement date is the same day as the trade or transaction date
- For mutual funds, options, government bonds, and government bills, the settlement date is one day after the trade date
- For foreign exchange spot transactions, U.S. equities, and municipal bonds, the settlement date occurs two days after the trade date, commonly referred to as "T+2"
In most cases, ownership is transferred without complication. After all, buyers and sellers alike are eager to satisfy their legal obligations and finalize transactions. This means that buyers provide the necessary funds to pay sellers, while sellers hold enough securities needed to transfer the agreed-upon amount to the new owners.
Failure Is an Option
Although it happens rarely, there are two ways in which settlements can go south. The first is called a long fail, where the buyer lacks adequate funds to pay for the purchased shares. The second is called a short fail, which happens when the seller does not have the necessarily available securities on the settlement date.
To read more, see Principal Trading and Agency Trading.