Trading stocks online in the year 2009, you’d expect everything to be real-time. That’s why most investors are stunned when they find out that stock trades take 3 days to “clear”. Here’s what it means for the average investor, and how it can be avoided.
In the good old days, nothing was real time. When a trade is made, shares are either physically transferred between parties, or between the parties’ brokerage firms. The process took 3 days. Because of this, when you went to make a trade at your local brokerage firm, they often allowed you to make the trade first, then bring the funds in within 3 days. This was known as T+3.
What many people do not know is that the system is still around today. Surely it doesn’t take 3 days for one brokerage firm or clearing firm to transfer the electronic data of stock ownership, and most online brokerage firms now verify that you have sufficient funds before allowing you to trade. However, the T+3 remains.
What this means is that when you buy a stock in a cash account, you don’t own the stock (fully settled) until 3 days after the trade date. If you sell, then you are selling unsettled stock. Most firms will allow it, but your account will be tagged with a “good faith strike”.
Same thing on the sell side. When you sell a stock, you see the money in your account. However, that fund is still considered unsettled until 3 days later. If you attempt to use that money, yep, another “good faith strike”.
If you accumulate 3 strikes (yet another baseball cultural reference transferred into securities trading), then your account is placed into 90 day restriction. Yikes.
One way to avoid this is to open a margin account. Stocks still settle in T+3, but you do not risk running into these good faith strikes.
Will we ever see the day when stocks go from T+3 to T+1, or actually have things occur in real time? We’re certainly moving in the right direction, but needless to say we worry about the ancient servers running the banking and investing industry, and how this fundamental change will affect its functions.
