The Different Types of Stock Settlements and How to Avoid Them
When you buy or sell a stock, the transaction doesn't happen instantaneously. Instead, it goes through a process called settlement. Depending on the type of account you have and the type of stock you're trading, settlements can take anywhere from two days to a week. Here's what you need to know about the different types of settlements and how to avoid them.
The most common type of settlement is T+2, which stands for trade date plus two days. This means that if you buy stock on Monday, the earliest you can sell it would be Wednesday. If you sell stock on Tuesday, the earliest you can buy it would be Thursday. T+2 settlements are standard for cash accounts and margin accounts that are not approved for naked short selling.
T+3 settlements are less common but still occur occasionally. With a T+3 settlement, the trade date is three days before the settlement date. So, if you buy stock on Monday, you wouldn't be able to sell it until Thursday at the earliest. And if you sell stock on Tuesday, you wouldn't be able to buy it again until Friday at the earliest. T+3 settlements usually only occur with bonds and mutual funds. However, they can also happen with stocks in certain circumstances, such as when there's a holiday or a market shutdown.
A T+4 settlement is even less common than a T+3 settlement. With a T+4 settlement, the trade date is four days before the settlement date. So, if you buy stock on Monday, you wouldn't be able to sell it until Friday at the earliest. T+4 settlements only occur in very rare circumstances, such as when there's a market shutdown or holiday. For example, if there's a market shutdown on Monday and Tuesday due to a hurricane, all trades from those days would settle on Friday since Wednesday and Thursday would also be holidays.
Avoiding Settlements Altogether with Margin Accounts
If you don't want to have to deal with settlements at all, then you can open a margin account. A margin account is a type of brokerage account that allows you to borrow money from your broker to purchase securities. The securities serve as collateral for the loan. Margin accounts are approved for naked short selling, which means you can sell securities that you don't actually own—you just have to borrow them from your broker. This essentially allows you to avoid settlements altogether because there's no need to wait for your trade to settle before selling it again—you can just keep selling it and re-borrowing it from your broker as needed.