T+3, T+2, T+1, Lift Off!
You’ll need a grasp of settlement dates in the real world, no matter what you trade. Let’s explain what T time is all about. This applies to everyone.
There are cash trading accounts and margin trading accounts. The ‘T+2 rule’ applies to cash accounts, where all the funds come from your bank account.
You deposit the cash, it sometimes takes two days to ‘settle,’ and then you can put it to work. You might decide to buy one share of Apple, so you hit confirm trade and the price is noted there and then on the transaction date.
This transaction has to settle, too, and that takes another two days.
You could still sell that share of Apple before two days goes by, before it has legally settled, with the intention of getting into Snap instead. The catch, though, is that you can’t go ahead and purchase Snap until the original trade for Apple has settled. If you did, you’d be ‘free-riding.’
If you have a margin account, things are a little different. You don’t have to wait because the brokerage will lend you funds to keep trading while other monies settle.
In September, 2017, the Securities and Exchange Commission (SEC) adopted T+2 waiting times for all stocks.
We call the transaction date, ‘T,’ and the settlement date, ‘T+1, T+2, or T+3.’ In the olden’ days, investors twiddled their thumbs for up to five business days as technology wasn’t advanced. In practice, now, Apple bought on a Tuesday settles on a Thursday.
|Government bills and bonds||T+1|
|FOREX (Foreign Exchange currency pairs)||T+2|
I am not a financial advisor and my comments should never be taken as financial advice. Investments come with risk, so always do your research and analysis beforehand.