T+3 and Stock Sales

Many elements of our stock system are completely antiquated when compared with other facets of our modern society.  One of the most “old-school” elements is the T+3 rule for being able to withdraw cash from your account after you sell stocks.

The “T” is the transaction date.  You can withdraw cash from your account THREE BUSINESS DAYS after the date of the transaction.  That’s a long time… the type of process that made sense when these sorts of events were settled manually and / or with confirmations sent by the US mail.

Here is the definition per Investopedia:

The Securities and Exchange Commission (SEC) sets securities’ settlement periods. For example, with the three-day settlement period, a stock trade occurring on Friday is settled on Wednesday, as long as no holidays occur during that time. Otherwise it takes an additional day, due to the markets being closed on weekends and holidays. The three-day settlement period for stocks was established when cash, checks and physical stock certificates were exchanged through the postal system. Adequate time was needed for traders to efficiently buy or sell the stocks and send money to their accounts or stock certificates to the purchasers.

Although money is now instantly transferred electronically, the settlement period remains in place as a convenience for traders and brokers. However, most online brokers require traders to have enough funds in their accounts before buying stock. Also, most physical stock certificates no longer exist; securities are typically traded electronically and are backed up by account statements.

The broker we use allows you to buy other stocks after the sale… you can immediately re-invest the funds while they wait for the T+3 days until the stocks “officially” clear.  But if you want to actually withdraw the cash, you need to wait all 3 business days.

This practice makes no sense for many reasons, but it is is for the benefit of the industry so I don’t see it changing anytime soon.

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