When you buy or sell securities, “settlement” refers to the official transfer of securities to the buyer’s account and the cash to seller’s account. Starting May 28, 2024, the securities industry has a shortened time for most securities to settle. Stocks, bonds, municipal securities, exchange-traded funds, certain mutual funds, and limited partnerships that trade on an exchange now settle on the next business day.
Since 2017, the settlement cycle for most securities transactions has been two business days. This was often referred to as “T+2.” Under “T+2,” if you sold shares of ABC stock on Monday, the transaction would settle on Wednesday. Under the new “T+1” setup, if you sell shares of ABC stock on Monday, the transaction will settle on Tuesday.
What does this mean in practical terms for most individual investors? Cash from the sale of stocks, bonds, and exchange-traded funds, for example, will be available in investors’ brokerage account or retirement account the following business day. This is one day sooner than investors were used to. On the other side of the coin, it means cash needs to be available to cover securities purchases by (at the latest) the business day after the trade.
While this change is merely administrative and does not affect an investment strategy, we feel this update is worth noting. This is particularly true for investors who have frequent trades in their account. In our view, the new “T+1” development is welcome news because it is another step in the industry becoming more efficient for investors.