In the financial world, time is money, so when a trade is executed, a day or two is needed to clear the transaction and pass the funds (ownership) from the buyer to the seller. This is where the disparity between the trade and settlement date occurs.
The transaction date is the date on which the transaction occurs, so for example, if you buy the shares of a company, or purchase treasury bills or bonds on the 23rd of May 2018, this date will be your transaction date. The transaction date will not change, as it will always be the date on which you made your transaction.
The Settlement date is, however, different because it refers to the date on which ownership is transferred and money is exchanged between buyer and seller.
Settlement dates are usually denoted by T+1, T+2, or T+3 days.
What Do T+1, T+2, or T+3 mean?
If you buy (or sell) a security with a T+3 settlement on Monday, and we assume there are no holidays during the week, the settlement date will be Thursday, not Wednesday. The T or transaction date is counted as a separate day. In Nigeria, bonds can also be traded on a T+2 basis.
This article was first published on Nairametrics on June 26, 2016.
