How does T+2 trading and settlement work?

by

Jack Derwin

July 7th 2022 3 minute read

If you’ve been investing or looking to, you may have come across T+2 trading and settlement. Commonly used across markets, it refers to how long it takes for investors to take ownership of their shares. Let’s explain.

What is T+2 trading and settlement?

Every time you buy or sell a share or an ETF on the stock market, a transaction takes place. Put simply, the market is matching you with someone who either wants to buy your shares or sell you theirs.

While that transaction (T) happens on the day your order is filled, it takes time to actually complete the trade and transfer share ownership between the buyer and the seller.

The standard in the United States and Australian financial systems is two days. Hence T+2 simply refers to the two days it takes for share ownership to be successfully transferred.

Why is settlement delayed? 

Due to the legwork involved and the limitations of technology, it has always taken time for share transactions to be processed. Thankfully this has been continually shortened over time, with the ASX moving from T+3 settlement to T+2 settlement in 2016.

As trading platforms and settlement systems have continuously evolved, so too has this delay been improved.

What does T+2 settlement mean for me?

Whether you trade with Superhero or another broker, you as an investor can reasonably expect your trades to be fully processed (or settled) within two business days. In fact, the ASX mandates that this is the maximum time allowable for settlement to take place.

Once that time period has elapsed, you can be certain that you have attained ownership over any shares you have bought or transferred ownership of any shares you have sold.

Why does that matter? Well if an investment pays a dividend or distribution, your buy order will need to have settled before the ex-dividend date for you to be eligible for the next one. In other words, if you buy a day before the ex-dividend date, you won’t settle until one day after it and you’ll miss out on that first distribution.

How about the other side of the transaction? Well with T+2 trading, if you’ve sold shares you can expect the cash to hit your account two business days after the sale.

If you had sold shares on a Tuesday for example, you’d have received the funds by that Thursday.If you sold on a Friday, you’d have received the funds by the following Tuesday as no progress is made over a weekend.

Invest in Aussie shares for $5 and U.S. shares and ETFs for $0 brokerage with Superhero or learn more about investing with Superhero’s Learn Hub.