What Is a Settlement Date?

What Is a Settlement Date?

By Charles Joseph | Editor, Financial Affairs
Reviewed by Corey Michael | Senior Financial Analyst

The settlement date is defined as the date when a trade is final, and the buyer must make payment. It is also when the seller delivers the asset or security to the buyer. For most securities, this happens two business days after the trade execution (trade date). This is often referred to as T+2 (Trade plus 2 days).

Related Questions

1. What is a trade date?

The trade date is the date on which an order to buy or sell a security is executed. This isn’t when the transaction is settled. Settlement occurs a few days later, depending on the type of security and market conditions.

2. What happens if you sell a stock before the settlement date?

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When you sell a stock before the settlement date, it’s referred to as a “good faith violation” because the seller doesn’t yet technically own the security. This could lead to restrictions on your trading account.

3. What are T+1, T+2, T+3 dates in trading?

These are terms used in the financial markets to indicate when settlement occurs following a trade. T+1 refers to trade date plus one day, T+2 is trade date plus two days, and T+3 is trade date plus three days. These varying timescales account for the different processing times for various types of trades.

4. Why do we need a settlement date?

A settlement date provides a clear deadline for the completion of a financial transaction. It ensures both parties have time to fulfill their side of the deal. It can also help protect both parties from market risk.

5. Is the settlement date the same in all countries?

No, the settlement date may vary from country to country. It predominantly depends on the market practices and law of the land. Most markets follow a T+2 settlement cycle, but some still operate on a T+3 basis.