Definition: Settlement date is the day on which a trade or a derivative contract must be settled by transferring the actual ownership of a security to the buyer, against necessary payment for the same. After a trade order is executed, it generally takes one to three days to settle it depending on the type of security bought. The settlement day excludes Saturdays, Sundays, bank, and exchange holidays.
Description: Whenever a security is bought or sold, two key dates are involved: the transaction date or trade date and the settlement date.
A transaction date represents the date on which a transaction occurs whereas the settlement date is the day on which the transaction is finalised, that is, the ownership of the security is transferred to the buyer. Here it’s important to understand that the settlement does not happen on the same day the transaction happened, as it takes time to actually deliver the security and transfer payment for the same.
For example, suppose you placed an online trade order on Monday, June 8, and it was executed on the same day. So, Monday, June 8, becomes your trading date. Then the settlement date will be Thursday, June 11, three days after the trade date and represented as T+3, where T is the trade date. The settlement period depends on the security type and the country. For example in the US, the settlement period for stocks and exchange-traded funds (ETFs) is T+3 and for mutual funds (MFs) it’s T+1 i.e. one market day after trade date.
