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“T” represents the transaction date on which an actual trade occurs. 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, or plus three days, respectively.
Today is the transaction date if you buy 100 shares of a stock right now. This date never changes. It will always be the date on which you made the transaction. The settlement date is a little trickier because it represents the time at which ownership is transferred. This doesn’t always occur on the transaction date. It varies depending on the type of security. Treasury bills can be transacted and settled the following day.
Key Takeaways
- The transfer of a security from a seller to a buyer must go through a settlement process which creates a delay between the time a trade is made (‘T’) and when it settles.
- The settlement cycle became a T+1 according to a rule from the SEC on May 28, 2024.
- A stock trade could historically take as many as five business days (T+5) to settle.
- Most stock trades settle in just one business day (T+1) due to advances in technology and electronic trading.
Why Delay Settlement?
Security transactions were accomplished manually rather than electronically in the past. Investors would wait for the delivery of a particular security which was in actual certificate form. Payment happened upon receiving the certificate. Delivery times could vary and prices always fluctuated so market regulators set a period in which securities and cash had to be delivered.
The settlement date for stocks was T+5 or five business days after the transaction date. The settlement date became T+2 or two business days after the transaction date in 2017. The settlement cycle became T+1 per a rule established by the U.S. Securities and Exchange Commission (SEC) on May 28, 2024. Transactions now settle one business day after the transaction date.
Fast Fact
Trades can take longer or less time to settle in other countries.
T+1 Settlement Cycle
The SEC’s 2024 decision to halve the time it takes to settle transactions is generally good news for most investors because it means gaining or offloading ownership rights sooner. Reverting to T+1 after a century makes markets more efficient and reduces risk.
The SEC helped reduce agreed-upon prices being drastically different from the price when the trade eventually settled. This was a concern that’s been on its radar since the GameStop stock bounce of 2021. The SEC said the new rules “make our market plumbing more resilient, timely, and orderly” and they “improve the processing of institutional trades by establishing new processing and recordkeeping requirements for broker-dealers and registered investment advisors.”
Pundits have also raised concerns of potential teething problems, however. Worries include global funds moving at different speeds to their assets, having less time to fix errors, and international investors struggling to keep up with the pace and source dollars on time. Investors may have to pay for their securities one business day earlier under the terms of the new settlement cycle.
When Do You Own the Stock or Get the Money?
The settlement date would be Tuesday if you bought or sold a security with a T+1 settlement on Monday. We’ll assume that there are no holidays during the week, The ‘T’ or transaction date is counted as a separate day.
Not every security will have the same settlement periods. All stocks are T+1. Mutual funds differ but are T+1 and T+2 depending on the fund. Bonds and some money market funds will vary between T+1, T+2, and T+3, however.
Your status as a shareholder of Microsoft wouldn’t be settled in the company’s record books until the following Monday if you bought shares of Microsoft (MSFT) on Friday. Your broker would debit your account for the total cost of the investment immediately after your order was filled,
The settlement date is the date upon which you become a shareholder of record. Weekends and public holidays aren’t included. The settlement date would be Tuesday in this case if Monday was a public holiday.
Important
Weekends and public holidays don’t count so if you bought stock on Friday you’d have to wait for the trade to settle until Monday or until Tuesday if Monday was a public holiday.
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. The trade must settle before the record date for the dividend for the stock buyer to receive the dividend.
Which Securities Are Affected by T+?
The T+1 settlement cycle applies to securities in the U.S. that previously traded in the T+2 settlement cycle. They include stocks, bonds, municipal securities, exchange-traded funds, certain mutual funds, and limited partnerships that trade on an exchange.
Could the Settlement Cycle Ever Be T+0?
People have begun to ask whether a T+0 settlement cycle is feasible now that T+1 has been achieved, particularly because it’s already been rolled out in countries such as India. It doesn’t seem very likely that this will happen in the U.S., however. Moving to T+1 took years to achieve, was already ambitious and made deadlines to settle trades too close for comfort in some cases. Taking it a step further might not yet be feasible.
What Does the T Stand for in T+1?
The T is shorthand for the “transaction date” which is the day the purchase or sale is registered. +1 means that the transaction will clear one business day later.
The Bottom Line
The trade doesn’t become final immediately when you place an order to buy or sell a security. It takes a while for it to clear and for everything to get signed off. T or the transaction date is when the transaction takes place and the settlement date, expressed as + a number, is when the transaction goes through.
Settlement dates depend on the security being traded. Stocks and most bonds are T+1 in the U.S. Trades for them settle one business day after the transaction is made.
