Whenever you buy or sell a stock, bond, exchange traded fund, or mutual fund, there are two important dates to understand: the transaction date and the settlement date. 'T' is the transaction date. The abbreviations T+1, T+2, and T+3 refer to the settlement dates of security transactions that occur on a transaction date plus one day, plus two days, and plus three days, respectively.
As its name implies, the transaction date represents the date on which the actual trade occurs. For instance, if you buy 100 shares of a stock today, then today is the transaction date. This date doesn't change whatsoever, as it will always be the date on which you made the transaction.
However, the settlement date is a little trickier because it represents the time at which ownership is transferred. It's important to understand that this doesn't always occur on the transaction date and varies depending on the type of security. Treasury bills, for example, are one of the few securities that can be transacted and settled on the following day.
- In order to clear the transfer of a security from a seller to a buyer, it must go through a settlement process, which creates a delay between the time a trade is made ('T') and when it settles.
- Historically, a stock trade could take as many as five business days (T+5) to settle a trade.
- Today, with the advances in technology and electronic trading, most stock trades settle in just two business days (T+2).
Why Delay Actual Settlement?
In the past, security transactions were done manually rather than electronically. Investors would wait for the delivery of a particular security, which was in actual certificate form, and payment happened upon receiving the certificate. Since delivery times could vary and prices always fluctuate, market regulators set a period of time in which securities and cash must be delivered.
Some years ago, the settlement date for stocks was T+5 or five business days after the transaction date. Until recently, a settlement was set at T+3. Today, it's T+2 or two business days after the transaction date.
When Do You Actually Own the Stock or Get the Money?
- If you buy (or sell) a security with a T+2 settlement on Monday, and we assume there are no holidays during the week, the settlement date will be Wednesday, not Tuesday. The 'T' or transaction date is counted as a separate day.
- Not every security will have the same settlement periods. All stocks are T+2, and mutual funds differ but are T+1 and T+2, depending on the fund. However, bonds and some money market funds will vary between T+1, T+2, and T+3.
If you buy shares of Microsoft (MSFT) on Friday, June 2, while your broker would debit your account for the total cost of the investment immediately after your order is filled, your status as a shareholder of Microsoft will not be settled in the company's record books until Tuesday, June 6. Therefore, the settlement date is the date upon which you become a shareholder of record. Note that weekends and public holidays are not included. In this case, if Monday was a public holiday, the settlement date would be Wednesday, June 7.
Knowing the settlement date of a stock is also important for investors or strategic traders who are interested in dividend-paying companies because the settlement date can determine which party receives the dividend. That is, the trade must settle before the record date for the dividend in order for the stock buyer to receive the dividend.
Correction—May 5, 2022: This article previously contained an error regarding the settlement date timeline for mutual funds.