T+1 (T+2, T+3)
What Is T+1 (T+2, T+3)?
T+1 (T+2, T+3) are abbreviations that allude to the settlement date of security transactions. The "T" stands for transaction date, which is the day the transaction takes place. The numbers 1, 2, or 3 denote how long after the transaction date the settlement — or the transfer of money and security ownership — takes place.
Understanding T+1 (T+2, T+3)
For determining the T+1 (T+2, T+3) settlement date, the main days counted are those on which the stock market is open. T+1 means that assuming a transaction happens on a Monday, settlement must happen by Tuesday. Moreover, T+3 means that a transaction happening on a Monday must be settled by Thursday, expecting no occasions happen between these days. But on the off chance that you sell a security with a T+3 settlement date on a Friday, ownership and money transfer don't need to take place until the next Wednesday.
Realizing the settlement date of a stock is likewise important for investors or strategic traders who are interested in dividend-paying companies in light of the fact that the settlement date can determine which party receives the dividend. That is, the trade must settle before the record date for the dividend for the stock buyer to receive the dividend.
Note that the period between transaction and settlement isn't strategic scheduling in which an investor can pull out of a deal. The deal is finished on the transaction day — it's just the transfer that doesn't take place until later.
In the past, security transactions were done physically rather than electronically. Investors would need to wait for the delivery of a particular security, which was an actual certificate, and they wouldn't pay until receipt. Since delivery times could shift and prices could fluctuate, market regulators set a period of time in which securities and cash must be delivered.
Ages ago, the settlement date for stocks was T+5, or five business days after the transaction date. Until recently, settlement was set at T+3. Today, it's T+2 (i.e., two business days after the transaction date).
Settlement dates change, as indicated by the type of security. All stocks are currently T+2; notwithstanding, bonds, mutual funds, and some money market funds will change between T+1, T+2, and T+3.
The SEC has recently introduced a proposal to shorten stock and ETF settlement to T+1. Whenever approved, the new rules would be in place by some time in 2024.
The settlement date is the date on which the investor turns into a shareholder of record. Ends of the week and public occasions are excluded from the day count.
Illustration of T+1 (T+2, T+3)
To act as an illustration of how T+1 (T+2, T+3) settlement dates work, consider an investor who purchases shares of Microsoft (MSFT) on Monday, April 5. While the merchant would debit the investor's account for the total cost of the investment immediately after the order is filled, the investor's status as a shareholder of Microsoft won't be settled in the organization's record books until Wednesday, April 7.
Correction — May 5, 2022: This article recently contained a blunder in regards to the settlement date timeline for mutual funds.
Highlights
- Stocks are normally T+2 and bonds, mutual funds, and money market funds change among T+1, T+2, and T+3.
- The letter "T" indicates the transaction date; the numbers 1, 2, or 3 denote how long after the transaction date the settlement takes place.
- T+1 (or T+2, T+3) are abbreviations that allude to the settlement date of transactions.
