What You Should Know About T Plus 1 Trade Settlement

The US stock market and other securities are set to change their settlement cycles from two business days to a single business day on May 28, 2024 While many investors may not notice a significant impact, it’s crucial to understand the implications of this shift, particularly for particular investors and transactions.

What Is T+1 vs T+2

The principle of T+1 as opposed to T+2 refers to the time it takes for a transaction to settle after the trading date (T). Simply put, under the T+1 framework, transaction settlement will occur on the business day following the trade. For instance, with the present T+2 system, a stock sold on Monday settles on Wednesday, two business days later. However, starting May 28, 2024, a stock sold on a Monday will settle the following business day, Tuesday.

Who Does T+1 Affect

The transition to T+1 may not significantly affect most investors as many brokerage firms require either cash or enough margin in the account before permitting any purchase orders for securities. If, however, your brokerage allows you to buy without sufficient funds, under T+1 you’ll need to ensure the funds are in your brokerage account by the next business day.

T+1 might also impact the delivery time for paper certificates of sold securities, though this practice is less common today due to the prevalence of electronic transfers. If you choose to sell a security with a paper certificate, you’ll need to deliver it to the brokerage firm by the next business day after trade execution.

What Investment Types Are Affected

Securities such as stocks, bonds, exchange-traded funds, certain mutual funds, municipal securities, real estate investment trusts, and master limited partnerships on U.S. exchanges will be affected by this shift. Government bonds and options remain unaffected as their settlement is already at T+1.

Determining an accurate cost basis is important when selling a security, as capital gains taxes are computed using this value which includes the initial investment, any fees or commissions, and reinvested dividends and distributions. The switch to T+1 won’t generally impact the calculation of cost basis. However, if you’ve bought a security through multiple brokerages, you’ll have one less day to provide past purchase information to your current firm. It’s advisable to ensure your current brokerage has complete cost-basis information on securities bought from previous brokerages.

While the shift to T+1 may bring about increased convenience for some investors, allowing them to fully own a security a day earlier than before, it also demands careful consideration of how the reduced settlement time could impact investment decisions, trading, or tax strategies. Investing, as always, carries inherent risks, including the potential loss of the principal amount, and there’s no guarantee that any investment strategy will yield success.

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