Settlement: regular way and options

A stock trade settles one business day later

You buy a stock, and the trade goes through. When do you actually pay, and when are the shares yours? That day is settlement. Settlement is the day the buyer's cash and the seller's shares change hands. The day you make the trade is the trade date, written as the letter T. Settlement is counted from there.

Regular way is the normal settlement cycle. Since May 28, 2024, regular way in the U.S. is T+1. That means one business day after the trade date. Say Jake buys shares on a Tuesday. His cash goes out and the shares come in on Wednesday.

Count business days only, so weekends and market holidays don't count. If Jake buys on a Friday, it settles Monday, as long as Monday is a business day. The mistake is using an old cycle. T+3 ended in 2017, and T+2 ended in 2024. If a choice says T+2, it's out of date.

Settlement is the day the cash and the shares change hands. For a regular-way stock trade, that's T+1, one business day after the trade.

Under T+1, the ex-dividend date is the record date

If you buy a stock right before a dividend, do you get it? It depends on the ex-dividend date. The ex-dividend date is the first day a buyer won't get the next dividend. A dividend is cash a company pays to its shareholders. To pay it, the company sets a record date. Whoever is on its list of owners that day gets paid.

You only get on that list when your trade settles. Settlement is the day the cash and the shares change hands. So your trade has to settle by the record date. Say the record date is a Thursday. Ana buys on Wednesday. Under T+1, her trade settles Thursday, one business day later, so she gets the dividend.

Ben buys on Thursday. His trade settles Friday, a day too late. Thursday is the first day buyers miss out, so Thursday is the ex-date. The mistake is using the old T+2 rule. Back then, the ex-date was one business day before the record date. Under T+1, they're the same day.

The ex-dividend date is the first day a buyer won't get the next dividend. Under T+1, it's the record date itself, when that's a business day.

Corporate bonds and options settle T+1 too

Does T+1 only apply to stocks? Corporate bonds settle T+1 too. T+1 means one business day after the trade date. Settlement is the day the cash and the securities change hands. Buy a corporate bond on a Tuesday, and it settles Wednesday.

Options follow the same clock. An option is a contract that gives you the right to buy or sell a stock at a set price. You'll learn them properly later. The premium is the price you pay for the option. Buy an option on a Wednesday, and the premium is due Thursday.

Exercising an option means using that right to actually buy or sell the stock. Say Lee exercises a right to buy on a Monday. That stock purchase settles Tuesday. The mistake is giving options a longer cycle, or waiting until the option expires. Settlement counts from the trade or the exercise.

Stocks, corporate bonds and options all settle T+1, one business day after the trade.

Worked example: Counting to settlement over a holiday

1. A customer buys stock on a Friday. The next Monday is a market holiday, so markets and banks are closed. When does the trade settle?
2. Regular way is T+1, one business day after the trade. Only business days count.
3. Skip Saturday and Sunday, because markets are closed on weekends.
4. Skip Monday too, because it's a holiday.
5. The first business day after Friday is Tuesday. The trade settles Tuesday.
6. Counting calendar days gives you Saturday. Using the old T+2 cycle gives you Wednesday. Both are wrong, so count business days and use T+1.

Common mistakes

T+2 is retired; regular way is T+1

Picking T+2 means using a cycle that ended on May 28, 2024. Since then, regular-way trades settle T+1, one business day after the trade date. Stocks, corporate bonds and options all settle T+1.