September 6, 2022
You are a new investor and made a savvy trade. You sell your shares for a profit, but not every penny has immediately shown up in your brokerage account. No need to fear: Your money is there.
Your money is simply going through what the Securities and Exchange Commission calls a settlement period. While a waiting period for monetary transactions may not make sense in an age where instant is the expectation, consider unsettled funds much like pending transactions in your bank account – funds that haven’t cleared yet.
Here’s why there’s a settlement period after your trade:
The waiting time serves practical purposes, but settlement periods also harken back to the time when owning a stock meant having a physical stock certificate. At that time, making a trade took several days to give time for the stock buyer and stock seller to physically exchange their certificates. The actual certificate was your proof of ownership.
Of course technology makes it possible to instantly make transactions, but government regulations have kept settlement periods in place. Under Federal Reserve Board Regulation T, securities transactions in a cash account must be paid for in full. You will see these settlement periods referred to as a strange looking equation (T+2 or T+3, for example). More about that in a second. By the end of the settlement period, a buyer must have paid for the trade completely and the seller must have delivered the security.
The settlement period is the time between the trade date (the date when the transaction occurs) and the settlement date (the date when the payment is made, and the transfer of the securities’ ownership occurs). In general, stocks settle T+2 – the trade date, plus two business days. Even though you can trade on banking holidays, they are not counted as settlement days. ETFs have the same T+2 settlement period as stocks, but not all trades are the same. Option trades settle one business day following the trade date (T+1) while most mutual funds have a settlement period of T+2, but some may settle between T+1 and T+3.
Individual investors using a cash account requires that you pay for all purchases in full by the settlement date. If you bought 1,000 shares of XYZ stock on Wednesday for $10,000, you would need to have $10,000 in cash available in your account to pay for the trade on the settlement date (T+2), which would in this case be Friday.
Technology can make it easy to get into trouble if retail investors are not aware of these regulations. The violations include: good faith violations, freeriding and cash liquidations. We will cover these in another TiiCKER Insight, but violating them can result in your brokerage restricting your account.
So if you make a trade and don’t see you funds available in your account right away, don’t sweat it. The market moves faster than the SEC, but everything will catch up in a few days.
Of course, if you are a retail investor and want perks simply for owning shares of your favorite company, it is easy to connect your brokerage to TiiCKER and start collecting your rewards.
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