A securities purchase is not complete in an instant even when the investor makes the order online. A broker still must execute the trade in a market. If brokers advertise fast service, the law requires they advertise truthfully. After all, prices often change even during a small delay. Although the government doesn't regulate how quickly brokers execute trades, it does regulate the time between trading and settlement.
The trade date is the day a broker executes an order to buy or sell securities. Use the trade date on your federal income tax when reporting transactions for stocks and bonds sold over-the-counter or on an exchange. The settlement date is the latest date when the buyer must deliver payment and the seller must deliver the securities. The settlement cycle is the time from the trade date to the settlement date.
The Securities and Exchange Commission regulates the maximum length of the settlement cycle to help keep the markets stable. A longer period from trade to settlement increases the possibility of buyers defaulting on payment. The time limit for settling most securities is T+3. This means that the seller must deliver the securities to the broker within three business days of the trade. The buyer also must deliver payment within three days. Securities coming under this rule include municipals, bonds, stocks, limited partnerships bought through exchanges and mutual funds bought through brokers. However, stock options and government securities must settle on the first business day after the trading day, or T+1.
Count to the settlement date beginning on the first business day after the trade date. For example, if the trading day occurs on Friday, begin counting day one on the following Monday. This means the buyer must deliver payment to the broker before the end of business on Wednesday. Stock market holidays may also affect T+3. Usually any day the financial markets are open counts as a business day. However, the Securities and Exchange Commission recommends verifying due dates with your broker.
The broker has several options if a buyer's payment is late. The broker can simply make the required payment and charge the buyer a penalty or interest. However, the broker may opt to resell the securities without delivering them to the buyer. The broker can then require the buyer to cover any losses plus transaction fees.
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