What Is T+1 (T+2, T+3)?
T+1 (T+2, T+3) are abbreviations that refer to the settlement date of security transactions. The "T" stands for transaction date, which is the day the transaction takes place. The numbers 1, 2, or 3 denote how many days after the transaction date the settlement—or the transfer of money and security ownership—takes place.
- T+1 (or T+2, T+3) are abbreviations that refer to the settlement date of transactions.
- The letter "T" indicates the transaction date; the numbers 1, 2, or 3 denote how many days after the transaction date the settlement takes place.
- Stocks and mutual funds are usually T+1 and bonds and money market funds vary among T+1, T+2, and T+3.
What Do T+1, T+2, and T+3 Mean?
Understanding T+1 (T+2, T+3)
For determining the T+1 (T+2, T+3) settlement date, the only days counted are those on which the stock market is open. T+1 means that if a transaction occurs on a Monday, settlement must occur by Tuesday. Likewise, T+3 means that a transaction occurring on a Monday must be settled by Thursday, assuming no holidays occur between these days. But if you sell a security with a T+3 settlement date on a Friday, ownership and money transfer do not have to take place until the following Wednesday.
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.
Note that the period between transaction and settlement is not flex time in which an investor can back out of a deal. The deal is done on the transaction day—it's only the transfer that does not take place until later.
In the past, security transactions were done manually rather than electronically. Investors would have to wait for the delivery of a particular security, which was an actual certificate, and they would not pay until receipt. Since delivery times could vary and prices could fluctuate, market regulators set a period of time in which securities and cash must be delivered.
Many years ago, the settlement date for stocks was T+5, or five business days after the transaction date. Until recently, settlement was set at T+3. Today, it's T+2 (i.e., two business days after the transaction date).
Settlement dates vary, according to the type of security. Treasury bills, for instance, are about the only security that can be transacted and settled on the same day. All stocks and most mutual funds are currently T+2; however, bonds and some money market funds will vary between T+1, T+2, and T+3.
The settlement date is the date on which the investor becomes a shareholder of record. Weekends and public holidays are not included in the day count.
Example of T+1 (T+2, T+3)
As an example of how T+1 (T+2, T+3) settlement dates work, consider an investor who buys shares of Microsoft (MSFT) on Monday, April 5, 2021. While the broker would debit the investor's account for the total cost of the investment immediately after the order is filled, the investor's status as a shareholder of Microsoft will not be settled in the company's record books until Wednesday, April 7.