The concept of trade settlement has important consequences for investors and investment traders. When an investor buys or sells a security, the trade is not complete until it has settled.
A securities trade is not complete--or settled--until the security is delivered to the buyer and the cash has been delivered to the seller. Although the transaction of the trade happens almost instantly in electronic trading, the settlement process does not happen at the same time as the trade.
The time to settle a trade is dictated by the regulatory agency governing the specific market. In the U.S., the Securities and Exchange Commission--SEC--dictates a three-business day settlement for stocks, bonds and broker-traded mutual funds. This is often annotated as a "T+3" settlement. Mutual funds directly with the fund companies, government bonds and options settle "T+1."
Video of the Day
The "T+3" trade settlement gives an investor until the third business day after a trade to provide the cash to her broker to deliver the stock if it is in certificate form. Trade settlement also means an investor cannot get the cash for a sold investment until three days after placing the trade.
"T+3" trade settlement is also the reason why a stock goes ex-dividend two business days before the record date. An investor who buys the stock two days before the record date will not be the owner of record on that date and will not be entitled to receive the dividend.