Trade Settlement Explained
Trade settlement cycle refers to the time period between the execution of a trade and the settlement of the trade, where the buyer and seller exchange payment and ownership of the security. The trade settlement cycle can vary depending on the type of security being traded and the market on which it is traded. Here's an example of a typical trade settlement cycle:
Trade execution: On Monday, an investor buys 100 shares of a stock for $50 per share, resulting in a total purchase price of $5,000.
Trade confirmation: Within 24-48 hours, the broker sends a trade confirmation to the investor, outlining the details of the trade.
Trade processing: The broker sends the trade details to the relevant parties, including the stock exchange, clearinghouse, and custodian bank.
Clearing and settlement: On Wednesday, two business days after the trade was executed (also known as T+2), the clearinghouse confirms the trade and facilitates the exchange of payment and ownership. The buyer's custodian bank pays the seller's custodian bank $5,000, and the seller's custodian bank transfers ownership of the 100 shares to the buyer's custodian bank.
Final settlement: On Friday, four business days after the trade was executed (also known as T+4), the buyer's custodian bank transfers ownership of the 100 shares to the investor's account.
This is a simplified example of a trade settlement cycle, and the actual process may involve additional steps and parties, such as brokers, depositories, and regulators. It's important for investors to be aware of the trade settlement cycle for the securities they trade, as it can impact the timing of cash flows and the availability of funds for further investment
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