Settlement

When you buy a share, the trade happens instantly on your screen, but the official transfer of the share to you and of your cash to the seller happens later. That final transfer is called settlement. The time between the trade and settlement is the settlement cycle. Most of the time you never notice it, but it affects when you can withdraw cash, how some account rules work and what happens at the expiry of derivatives.

Trade date and settlement date#

• Trade date (T): the day your order is executed.
• Settlement date: the day ownership and cash officially change hands, written as T plus a number of business days.

Why settlement takes time#

Behind every trade, several things must happen: the trade details are matched and confirmed, the clearing house nets each firm's trades, and cash and securities move between custodians. In the United States, the Depository Trust and Clearing Corporation handles most of this for stocks. Shortening the cycle reduces risk, because less can go wrong between trade and settlement, but it requires faster operations.

How settlement affects traders#

Withdrawals#

Proceeds from a sale are generally not available to withdraw until settlement. Sell shares on Monday under T+1 and the cash settles on Tuesday.

Cash account rules#

In a US cash account, buying with unsettled funds and selling before those funds settle can create a "good faith violation". Repeated violations can restrict the account. Margin accounts avoid this, but bring their own risks. See Account Types and Margin Rules.

Dividends#

To receive a dividend, you must be the owner on the record date. With T+1 settlement, the ex-dividend date is usually the same as the record date, so you must buy before the ex-dividend date. See Dividends.

Cash settlement vs physical settlement#

For derivatives, settlement also describes how a contract is finished at expiry:

• Physical settlement: the actual asset is delivered. A physically settled crude oil future ends with oil changing hands; an exercised stock option ends with 100 shares delivered per contract.
• Cash settlement: no asset changes hands. The difference between the contract price and a final reference price is paid in cash. Stock index futures and index options, such as those on the S&P 500, are cash settled because you cannot deliver an index.

Most traders close or roll physically settled futures before the delivery period to avoid delivery obligations. See Physical Delivery vs Cash Settlement and Rolling Futures Contracts.

Settlement in prediction markets#

In prediction markets, settlement, often called resolution, is when the outcome is decided and winning shares are paid $1 each. Each market's rules name the data source and time used. On Polymarket, short crypto up or down markets settle using price data from Chainlink, while most other markets resolve through UMA's optimistic oracle process. See Price to Beat and How Rounds Settle and How Polymarket Works.

Settlement risk#

Settlement risk is the danger that one side delivers and the other does not. Central clearing, delivery versus payment systems and shorter cycles are all designed to reduce it. In currency markets, the CLS system settles both sides of many FX trades simultaneously for the same reason.

Frequently asked questions#

What does T+1 mean?#

It means the trade settles one business day after the trade date. US stocks moved to T+1 on May 28, 2024.

Can I sell a stock before it settles?#

Yes. You own it for trading purposes once your order fills, but in a cash account you must be careful about using unsettled funds to avoid violations.

What is the difference between clearing and settlement?#

Clearing is confirming, matching and netting trades and managing the risk until settlement. Settlement is the final exchange of cash and assets.

Sources#

• U.S. Securities and Exchange Commission, New T+1 settlement cycle
• Wikipedia, Settlement (finance)