Before online trading platforms were available, owning a stock meant possessing a physical stock certificate, and it took several days to complete a trade. The Securities and Exchange Commission (SEC) created settlement periods so buyers and sellers had time to physically exchange their respective halves of the trade.
It doesn’t take days to transfer money anymore, but settlement periods are still a factor in securities trading, and they do affect when you can access your money and place new trades.
What are unsettled funds and why do they matter?
The proceeds created by selling a security are considered unsettled funds from the time you place a trade until the end of the settlement period, when the sale is final. By the end of the settlement period, a buyer must have paid for the trade completely and the seller must have delivered the security. You cannot withdraw unsettled funds, but you can use them to buy additional securities.
You typically cannot withdraw unsettled funds until they are fully processed and settled.
What are settled funds?
After the settlement period has ended, the proceeds from the sale become settled funds. You can use settled funds for any trading or cash transfers. Similarly, cashing your deposit into your brokerage account to use for trading is considered settled.
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How long does settlement take?
Most stocks have a one-business-day (T+1) settlement period. For example, if a stock is sold on Tuesday, the trade is finalized on Wednesday. Those two days make up the settlement period.
Can you buy other securities with unsettled funds?
Brokerages typically let you use sale proceeds right away as part of your “cash available to trade.” With Ally Invest, you can use these funds right away to trade most securities, subject to standard settlement rules.
When you buy a security with unsettled funds, you must hold the new security until the original sale fully settles. Selling it before then can lead to a good faith violation.
Can you withdraw unsettled funds?
You typically cannot withdraw unsettled funds until they are fully processed and settled.
Trading violations and penalties to watch for
Be aware of these potential settlement issues:
Cash liquidation violation: Committed when you don't have sufficient cash to cover the cost of a trade
Freeride violation: Occurs when you purchase a security in a cash account with insufficient funds and sell the same security before paying for it in full by the settlement date
Good faith violation: While unsettled funds may be used to purchase a security in good faith, you cannot sell any part of the newly purchased security before the funds have settled
Special cases: Mutual funds, ETFs, options and fractional shares
While most securities use a T+1 settlement period, there may be a few exceptions:
Mutual funds may settle on the next business day or on a longer cycle
Options trades have their own settlement schedules
Fractional shares or rewards may show as pending until the underlying trade fully settles
When do you officially own a stock?
A stock is officially yours on the settlement date, not the trade date. In most scenarios, this means you own the stock the day after purchase.
Tips to help avoid settlement problems
Follow these guidelines to avoid trading violations:
Check your specific broker’s disclosures and settlement policies, as they may vary from firm to firm
Keep a cash buffer so you won’t need to use unsettled funds for urgent trades or withdrawals
Avoid frequent day trading in a cash account to prevent good faith or freeriding violations
Make withdrawals only after funds have settled
If you want more flexible buying power, consider a margin account (as long as you understand the risks)
Settle down and trade on
While stock trades don't require the in-person cash handoff they did in the past, settlement periods still remain. Understanding unsettled funds and how you can and cannot use them will help you keep your trades in line.
