Trade vs Settlement Date: What’s the Difference?

The day that an investor or trader’s buy or sell order for a security is confirmed is called the trade date. But the day that the security actually changes hands is called the settlement date.

Both the trade date and the settlement critical to understand for investors who may not realize that there are things taking place behind the scenes when they’re buying or selling investments.

What Is a Settlement Date in Investing?

As mentioned, the settlement date in investing refers to the date that a security which is purchased or sold exchanges hands between the buyer and seller. It’s the day that a transaction or trade is final, in other words. It’s like buying a car or house — the transaction process may take some time, but it’s not really final until the keys are handed over.

Generally, the settlement date for a transaction is two business days after the trade date. So, if you make a trade, you should anticipate that it won’t be settled for at least a couple of business days.

Types of Settlement Dates

Depending on the specific security involved in a trade or transaction, settlement dates may vary. You can read further below for more detail, but typically you can expect a settlement date to be two business days following the sale or purchase of a stock, bond, or exchange-traded fund (ETF). This is sometimes referred to as “T+2,” meaning “trade date, plus two days” to settle.

Further, some types of securities, like government securities or options, may only require one business day to settle (T+1). Others, like mutual funds, may require between one and three business days.

Trade and Settlement Dates Explained

To recap, the trade date is the day that an investor actually executes a trade from their brokerage account — they decide to buy or sell a security, and go through the necessary steps to make the transaction. That day, say it’s a Tuesday, is the trade date.

The settlement date comes after that. Again, if you’re buying stock, it’ll take two business days for everything to settle, and if you made the trade on Tuesday, the settlement date will probably be on Thursday (two business days later).

These built-in delays between the trade date and settlement date aren’t due to you doing anything wrong, and there’s not much you can do to speed it up — it’s more or less how stock exchanges work.

Why Is There a Delay Between Trade and Settlement Dates?

Given modern technology, it seems reasonable to assume that everything should happen instantaneously. But the current settlement rules go back decades, way back to the creation of the Securities and Exchange Commission (SEC) in 1934, when all trading happened in person, and on paper.

Back then, a piece of paper representing shares of a security had to be in the possession of traders in order to prove they actually owned the shares of stock. Moving this paper around sometimes took as long as five business days after the trade date, or T+5.

💡 Recommended: A Brief History of the Stock Market

What Is the T+2 Rule?

As discussed, the T+2 rule refers to the fact that it takes two days beyond a trade date for a trade to settle. For example, if a trade is executed on Tuesday, the settlement date will be Thursday, which is the trade date plus two business days.

Note that weekends and holidays are excluded from the T+2 rule. That’s because in the U.S., stock exchanges are open from 9:30am to 4:00pm Eastern time Monday through Friday.

The T+2 rule has been enforced by the SEC since 2017. Before then, the T+3 rule was in place.

What Investors Need to Know About T+2

This delay in settling applies to trading of almost all securities. An exception is Treasury bills, which can settle on the same day they are transacted.

Investors who plan on engaging in cash account trading need to know about trade vs. settlement date. Cash accounts are those in which investors trade stocks and exchange-traded funds (ETFs) only with money they actually have today. Meanwhile, margin trading accounts allow investors to trade using borrowed money or trade “on margin.”

An investor may notice two different numbers describing the cash balance in his or her brokerage account: the “settled” balance, and the “unsettled” balance. Settled cash refers to cash that currently sits in an account. Unsettled refers to cash that an investor is owed but won’t be available for a few days.

Are T+1, T+0, or Real-Time Settlement Possible?

Market observers have called for the T+2 rule to be reevaluated, as the settlement process may be able to be sped up and improve trading conditions.

Clearinghouses — which serve as middlemen in financial markets that ensure the transfer of a security goes through — have previously said that the settlement process should be changed from two days to one. But in recent years, market volatility has actually prompted greater scrutiny and interest in regulations surrounding clearing and settlement. That included a lot of trading during the “meme stock” frenzies in 2020 and 2021.

Moving to T+1, T+0 or real-time settlement would need the approval of the SEC and collaboration of dozens of stakeholders across Wall Street. But the real-time transactions made possible in the cryptocurrency market by blockchain technology have escalated chatter for modernizing securities markets.

Potential Violations of the Trade Date vs Settlement Date

Knowing the difference between trade date vs. settlement date can allow investors to avoid costly potential trading violations.

The consequences of these violations could differ according to which brokerage an investor uses, but the general concept still applies. Violations all have one thing in common: They involve the attempted use of cash or shares that have yet to come under ownership in an investor’s account.

Cash Liquidation Violation

To buy a security, most brokerages require investors to have enough settled cash in an account to cover the cost. Trying to buy securities with unsettled cash can lead to a cash liquidation violation, as liquidating a security to pay for another requires settlement of the first transaction before the other can happen.

Let’s look at a hypothetical example: Say Sally wants to buy $1,000 worth of ABC stock. Sally doesn’t have any settled cash in her account, so she raises more than enough by selling $1,200 worth of XYZ stock she has. The next day, she buys the $1,000 worth of ABC she had wanted.

Because the sale of XYZ stock hadn’t settled yet and Sally didn’t have the cash to cover the buy for ABC stock, a cash liquidation violation occurred. Investors who face this kind of violation three times in one year can have their accounts restricted for up to 90 days.

Free Riding Violation

Free riding violations occur when an investor buys stock using funds from a sale of the same stock.

For example, say Sally buys $1,000 of ABC stock on Tuesday. Sally doesn’t pay her brokerage the required amount to cover this order within the two-day settlement period. But then, on Friday, after the trade should have settled, she tries to sell her shares of ABC stock, since they are now worth $1,100.

This would be a free riding violation — Sally can’t sell shares she doesn’t yet own in order to purchase those same shares.

Incurring just one free riding violation in a 12-month period can lead to an investor’s account being restricted.

Good-Faith Violation

Good-faith violations happen when an investor buys a security and sells it before the initial purchase has been paid for with settled funds. Only cash or proceeds from the sale of fully paid-for securities can be called “settled funds.”

Selling a position before having paid for it is called a “good-faith violation” because no good-faith effort was made on the part of the investor to deposit funds into the account before the settlement date.

For example, if Sally sells $1,000 worth of ABC stock on Tuesday morning, then buys $1,000 worth of XYZ stock on Tuesday afternoon, she would incur a good-faith violation (unless she had an additional $1,000 in her account that did not come from the unsettled sale of ABC).

With these examples in mind, it’s not hard for active traders to run into problems if they don’t understand cash account trading rules, all of which derive from trade date vs. settlement date. Having adequate settled cash in an account can help avoid issues like these.

Settlement Date Risks

Given that a lag exists between the trade date and settlement date, there are risks for traders and investors to be aware of — namely, settlement risk, and credit risk.

Settlement Risk

Settlement risk has to do with one of the two parties in a transaction failing to come through on their end of the deal. For example, if someone agrees to buy a stock, but then does not pay for it after ownership has been transferred. In this case, the seller assumes the risk of losing their property and not receiving payment.

This tends to happen when trading on foreign exchanges, where time zones and differing regulations can come into play.

Credit Risk

Credit risk involves potential losses suffered due to a buyer failing to hold up their end of a deal. If a transaction is executed and the buyer’s funds are not transferred before the settlement date, there could be an interruption in the transaction, or it could be canceled altogether.

History of Settlement Dates

The SEC makes the rules regarding how stock markets operate, including trades, and even what a broker does in regard to retail investing. As such, the SEC is tasked with creating the clearance and settlement system — a power it was granted back in the mid-1970s.

Prior to the SEC’s involvement, exchanges and transfers of security ownership were left up to participants, with sellers delivering stock certificates through the mail or even by hand in exchange for payment. That could take a long time, and prices could move a lot, so the SEC came in and set the settlement date at five business days following the trade date.

But as technology has progressed, transactions have been able to execute much faster. In 1993, the SEC changed the settlement date to three business days, and in 2017, it was changed to two days.

The Takeaway

The trade date is the day an investor or trader books an order to buy or sell a security, and the settlement date is when the exchange of ownership actually happens. For many securities in financial markets, the T+2 rule applies, meaning the settlement date is usually two business days after the trade date — so, not including weekends or holidays. An investor therefore will not legally own the security until the settlement date.

While there’s been chatter that the settlement process needs to speed up to either T+1 or real-time settlement, it’s still important for investors and traders to know these rules so they don’t make violations that lead to restricted trading or other penalties, and so they can properly gauge the risks of trading.

While you can’t make trades settle faster, you can start trading online using SoFi Invest®. You can invest in stocks, exchange-traded funds (ETFs), and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.

FAQ

What’s the difference between trade date and settlement date?

The trade date is when an investor initiates a buy or sell order, and the settlement date is when ownership of the underlying security is actually transferred. That generally happens two business days after the trade date (also called T+2).

Is the settlement date the issue date?

Typically, the settlement date and issue date are the same, as the settlement date is when a security actually exchanges hands. But there are times when the two can be different, concerning specific types of securities.

Why does it take two days to settle a trade?

The two-day lag between the trade date and settlement is designed to give a security’s seller time to gather and transfer documentation , and to give a buyer time to clear funds needed for settlement.

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