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.
Key Takeaways
- 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).
WhyDelay 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+2or 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+2settlement 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.
FAQs
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.
What does the T stand for in T 2? ›
This settlement cycle is known as "T+2," shorthand for "trade date plus two days." T+2 means that when you buy a security, your payment must be received by your brokerage firm no later than two business days after the trade is executed.
What is the meaning of T 2? ›
When does settlement occur? For most stock trades through May 24, 2024, settlement occurs two business days after the day the order executes, or T+2 (trade date plus two days). For example, if you were to execute an order on Monday, it would typically settle on Wednesday.
What does T 1 settlement mean? ›
But for some, the time it takes to settle a trade can significantly influence portfolio and trading decisions (more below). Known officially as T+1 (trading day plus one business day), this transition will put trade settlement for stocks, bonds, and related assets on the same one-day timetable.
What is the T 3 rule? ›
It refers to the obligation in the brokerage business to settle securities trades by the third day following the trade date. The settlement occurs when the seller receives the sales price (the broker's commission) and the buyer receives the shares.
What does t 3 days mean? ›
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. 1.
What does T and T stand for? ›
T&T has a double meaning — the names of the two founder's daughters, Tina and Tiffany, as well as two early investors. Founder Cindy Lee started T&T in 1993. ( T&T) The company explains the name's origins in a timeline of its growth on its website.
What is T 3 listing? ›
It means that the listing candidates will have to make their debut at Dalal Street within three-working days after bidding for the issue ends.
Is it T 1 or T 2? ›
T+1 (trade plus one) means that market trade-related settlements will need to be cleared within one day of the actual transactions taking place. Earlier, trades on the Indian stock exchanges are settled in two working days after the transaction is done (T+2).
What does T number mean? ›
noun. : a number that is similar to the f-number but takes into account the amount of light actually transmitted by a lens after loss by absorption and reflection and that equals the f-number divided by the square root of the transmittance.
India becomes the second country after China to move into the T+1 (trade + 1) settlement cycle from 27 January 2023. SEBI has implemented this new cycle to bring operational efficiency, quicker fund remittances, share delivery, and easy trading for stock market investors.
Do mutual funds settle T 1 or T 2? ›
Currently, the vast majority of mutual funds traded in the US are settled T+1. However, the other main asset classes used by retail investors, equities and ETFs, settle T+3.
What is the T 1 rule? ›
Under the new T+1 settlement cycle, most securities transactions will settle on the next business day following their transaction date. Using the example from above, if you sell shares of a stock on Tuesday, the transaction will now settle on Wednesday.
How do you work out T1 and T2? ›
Make sure you follow the 3 packers rules and define your T1 and T2 weights. No more than 2.4% of T1 in the batch and no T2s in your batch. So if your target weight is 180g then your T1 will be 4.5% so 180-4.5% = T1 = 171.9g and T2 is that figure x 2 so t2 = 180-16.2 = 163.8g.
What does T 1 2 mean in physics? ›
Half-life (symbol t½) is the time required for a quantity (of substance) to reduce to half of its initial value. The term is commonly used in nuclear physics to describe how quickly unstable atoms undergo radioactive decay or how long stable atoms survive.
