Settlement is the process of selling a stock and receiving the payment. A period of time is allowed for the seller to deliver the stock and the buyer to provide the cash purchase price.
Function
The three-day settlement period starts the day after the trade date. If you sell stock on Friday, Monday is day one, and settlement will be day three, or Wednesday. At settlement, you should be able to withdraw money from your account or go to the stock broker’s office and get a check. If you are holding the stocks in certificate form, you must deliver them to the broker by the settlement date.
Considerations
When you sell stock through an online account, the cash from the sale will be credited to the account immediately. Remember: These are unsettled funds. Normally, it is not a problem to make trades with the funds, but if something goes wrong with the trade, you may be required to provide additional cash for follow-on trades.
Warning
When you place a trade to sell stock online, make sure the trade is filled. The worst time to find out the trade did not occur is three days later, when you need the cash. It is your responsibility to make sure the trade was actually completed.
Effects
One effect of the three-day settlement is on dividend payments. The date a dividend is credited to your account is called the record date. A stock paying a dividend goes ex-dividend three days before the record date. If you sell the stock less than three days before the record date, you will receive the dividend even though you no longer own the stock.