How Trades Settle: T+1 and T+2

Introduction

When you place an order, the trade is agreed instantly — but money and shares are actually exchanged later, in a process called settlement. This lesson explains T+1/T+2 and why it exists.

Trade vs Settlement

Trading and settlement are two separate steps:

1. Trade — you and a seller agree on price and quantity (instant) 2. Settlement — cash and securities are actually exchanged (later)

Until settlement completes, the trade exists as an obligation.

The "T+" Notation

Settlement is quoted as "T+n" — business days after the trade date (T):

• T+1 — settles one business day later
• T+2 — settles two business days later

Why Settlement Takes Time

Settlement used to be slow because of paper certificates and manual record-keeping. Good settlement requires:

• Matching buyer and seller records
• Transferring ownership in the central depository
• Confirming cash and securities move correctly

The Role of Clearing Houses

Clearing houses sit between buyers and sellers to reduce risk. They:

• Guarantee trades even if one party defaults
• Net obligations so less money changes hands
• Manage the flow of securities and cash

Why It Matters to You

Settlement affects when you:

• Receive the shares (when you buy)
• Receive the cash (when you sell)
• Have access to buy with unsettled-sale proceeds ("free riding" rules)

Real-World Example

You sell shares on Monday. Under T+1 settlement, the cash settles on Tuesday — even though you agreed the price on Monday. The price in the trade is locked in at the agreement.

Summary

• Trade (agreement) and settlement (exchange) are separate
• "T+n" counts business days after the trade date
• T+1 shortens the gap and reduces risk
• Clearing houses guarantee and net trades
• Settlement timing affects when cash and shares are available

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