Overnight, a customer's 300 shares become 900, the quote drops from $96 to $32, and her two call contracts turn into six. She lost nothing. You need to be able to explain why, and to know how the trade, the paperwork and the shareholder vote behind each position work.
Every trade has two dates. The trade date, written T, is the day the order executes. The settlement date is the day cash and securities change hands at the agreed price and the buyer becomes the owner. The gap lets firms match and confirm the trade. Each extra day, though, is a day when one side could fail to pay or deliver.
Of all the settlement cycles, regular-way is the one to assume when a question names no other. Regular-way settlement is the standard date that applies unless buyer and seller agree otherwise when they trade. Since May 28, 2024, Securities and Exchange Commission (SEC) Rule 15c6-1 has set it at T+1, one business day after the trade date.
Common mistakes
- Stale settlement counts: Some candidates answer T+2 for regular way, or T+3 for settlement. Regular way is T+1 for stocks, corporate and municipal bonds, Treasuries and options. T+3 is only the Reg T payment period, and a cash trade settles the same day.
- Keeping the old per-share basis: Take 100 shares sold at $14 after a 1-for-5 reverse split of a $2,000 purchase. Using the old $2 basis reports a $1,200 gain instead of $400.
- Fractional contracts: Turning one contract into 1.5 contracts after a 3-for-2 split is wrong. Only whole-share ratios add contracts, and ordinary cash dividends get no adjustment.
Bottom line
- Regular-way settlement is T+1 for stocks, corporate and municipal bonds, Treasuries and options; cash trades settle the same day; Reg T payment is due by T+3.
- Most securities are held in street name by book entry at a depository; certificates remain available where an issuer offers them.
- The ex-date for an ordinary cash dividend equals the record date; splits and distributions of 25% or more go ex the first business day after the payable date.
- Splits multiply shares and divide price by the ratio; total value and total cost basis never change, and the holding period carries over.
Exam shortcut
Find the verb in the stem first. "Settle" or "regular way" means T+1 for any product. "Pay" in a cash account means T+3, and "cash trade" means today. For any split, write the ratio as a fraction and run three checks: shares times the ratio, price divided by it, and total value and basis unchanged. An answer that changes the total is wrong.
The full lesson (about 3,899 words, 26 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- C14
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