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Making Your First Trade

T+2 and Cash Availability

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T+2 and Cash Availability

While US stocks now settle T+1, some securities still use T+2 or T+3, and some brokers impose additional holds on cash. Understanding these delays prevents you from accidentally violating trading rules or running short of funds.

Key takeaways​

  • The SEC mandated T+1 settlement for stocks and ETFs as of May 28, 2024, but mutual funds, international securities, and some bond securities still settle T+2 or T+3.
  • "Good-faith" violations occur when you buy a security and sell it before the proceeds from an earlier trade have settled.
  • Different account types (cash account, margin account, IRA) have different settlement and cash-availability rules.
  • Your broker may impose holds (up to 5 business days) on deposits, wire transfers, or proceeds from certain sales.
  • Planning your trades around settlement windows prevents violations and keeps your cash available when you need it.

T+1 vs T+2: What changed in 2024?​

As of May 28, 2024, most US-traded stocks and ETFs settle T+1—that is, one business day after trade date. Mutual funds, international securities traded in home markets, and some fixed-income securities still settle on different schedules:

  • T+1: US stocks, US-traded ETFs.
  • T+2: Some international stocks, some bonds, some mutual funds.
  • T+3 or longer: Some mutual funds, illiquid or thinly traded securities.

For a first-time investor buying broad index funds (VTI, VXUS, BND, or VTSAX), this distinction rarely matters. But if you are trading individual stocks, international equities, or swapping between fund families, settlement timing becomes relevant.

Cash availability rules in a cash account​

A "cash account" (the default for most retail investors) has strict rules: you cannot buy a security unless you have settled cash available to pay for it.

Here is a scenario that creates a cash-availability problem:

Friday, May 31, 2024:

  • You have $5,000 in settled cash.
  • You buy $5,000 of VTI (stock; T+1 settlement).
  • Your account now shows: $5,000 VTI, $0 cash.
  • Settlement occurs Monday, June 3 (because Saturday–Sunday is a weekend).

Friday afternoon, same day:

  • Your VTI settlement is Monday.
  • But you realize you actually wanted to buy BND instead.
  • You sell your $5,000 VTI (sale executes Friday afternoon).
  • You have $5,000 from the sale, but it doesn't settle until Tuesday, June 4.
  • You try to immediately buy $5,000 BND (Friday, May 31).
  • This is a good-faith violation. You are trying to use unsettled proceeds to buy a new security.

What happens? Your broker may reject the BND order, or if it is accepted, you get a warning and a 90-day flag on your account. If you accumulate three good-faith violations in a rolling 12 months, your broker may freeze your account to cash-only (no more buying on unsettled funds for 90 days).

How to avoid good-faith violations​

The simple rule: never spend proceeds from a sale until they have settled.

If you sell on Friday (T+1 settlement on Monday), wait until Tuesday to buy with those proceeds. If you sell on Friday a mutual fund that settles T+2 (settlement on Tuesday), wait until Wednesday to buy again.

Most brokers offer a settlement calculator on their website or in their account portal. You can plug in the sale date and security type, and it tells you when the cash is available for a new purchase.

Alternatively, maintain a cash buffer. If you know you want to be able to trade frequently, keep 10–20% of your account in cash or a money market fund. This gives you flexibility to buy without waiting for settlement.

Cash holds and deposit delays​

Settlement delays are one issue. Broker-imposed holds are another.

When you deposit money into your brokerage account (via bank transfer, wire, or check), your broker may impose a hold:

  • ACH transfers (3–5 business days): If you transfer from your bank via ACH (the slow method), your broker may hold the funds for the full 5 days, even though the transfer often completes in 1–2 days. This is a conservative policy to protect against reverse transfers (if your bank account doesn't have sufficient funds, the transfer is reversed).
  • Wire transfers (1–3 business days): Wires are faster but may still have a hold period while the broker verifies the source of funds (anti-money-laundering rules).
  • Check deposits (5–10 business days): Slower still, and broker holds are longer.

Additionally, if you deposit a large sum (some brokers flag deposits over $25,000), your broker may impose a mandatory 5-business-day hold for regulatory reasons.

The takeaway: if you are about to make a large purchase, initiate your deposit well in advance. Don't expect to deposit $50,000 on Monday and have it available to buy on Monday.

Good-faith violations: A detailed example​

Let's trace through a real scenario:

Week 1: Monday, June 10, 2024

  • You have $10,000 in settled cash in your Fidelity brokerage account.
  • You buy $5,000 of VTI. Account now shows: VTI $5,000, Cash $5,000.
  • VTI settlement: Tuesday, June 11 (T+1).

Week 1: Thursday, June 13, 2024

  • VTI has settled (Tuesday), so your $5,000 is locked in as VTI and $5,000 remains as cash.
  • You decide you don't like VTI and sell it. Cash from the sale will settle Tuesday, June 18 (T+1).
  • Your account immediately shows: VTI $0 (sold), Cash $5,000 (existing) + $5,000 (from sale, unsettled).
  • Fidelity labels the $5,000 from the sale as "unsettled."

Week 1: Thursday, same day

  • You see your $10,000 in cash and want to immediately buy $5,000 of VTSAX (mutual fund) and $5,000 of BND (bond fund).
  • You place the order.
  • Fidelity rejects the BND purchase and issues a good-faith warning. You can buy VTSAX with your original $5,000 settled cash, but not BND with the unsettled proceeds.

Week 2: Tuesday, June 18

  • The VTI sale settles.
  • Your $5,000 from the VTI sale is now settled cash.
  • You can buy BND now.

Settlement timing for different security types​

Margin accounts and settlement workarounds​

If you open a margin account (available to most investors with $2,000+ and subject to broker approval), you can buy on unsettled funds. Your broker lends you the money for the day, and you owe interest.

For example:

  • You sell VTI on Friday (proceeds settle Monday, T+1).
  • You want to buy BND on Friday, before settlement.
  • In a margin account, you can buy BND Friday using a margin loan.
  • Monday, when the VTI proceeds settle, the margin loan is automatically repaid.
  • You owe zero interest because the loan lasted less than one day (most brokers have a grace period or daily rounding).

This is technically a margin loan, but for short-duration trades (waiting for settlement), it is nearly interest-free.

Margin is a double-edged sword. If you are not disciplined, you can borrow far more than you should and end up with crushing interest bills or a forced liquidation if the market drops. For a first-time investor, margin is best avoided. Keep a cash buffer instead.

International securities and settlement​

If you buy a stock listed on the London Stock Exchange (LSE) or Tokyo Stock Exchange (TSE) through a US broker, settlement happens according to the home market's rules—not US rules.

  • UK stocks: Settle T+2 (London Clearing House rules). So a purchase on Monday settles Wednesday.
  • Canadian stocks: Settle T+2 (same as US).
  • Australian stocks: Settle T+2 (home market rules).

For a US broker to handle these, they coordinate with international custodians and may impose additional holds. A purchase of Unilever stock (listed on LSE) might take 3–5 business days to fully settle through your US broker, even though the LSE itself settles T+2.

For most retail investors, buying US-traded ETFs (like VXUS, which holds international stocks) is simpler than buying foreign-listed securities directly. The ETF settles in your US account T+1, and the ETF provider handles the international settlement behind the scenes.

The practical approach for a beginner​

If you are making your first trades:

  1. Maintain a cash buffer. Keep 20% of your account in cash or a money market fund. This eliminates settlement friction.
  2. Trade infrequently. Buy-and-hold investors don't hit settlement limits. If you are buying 2–4 times per year, good-faith violations are essentially impossible.
  3. Plan big purchases. If you are about to invest a large sum, initiate the deposit 5–7 days in advance to ensure the cash has settled.
  4. Avoid margin until you are experienced. Margin is useful for leveraged traders, but it is unnecessary for a buy-and-hold investor building their first portfolio.

Next​

By now, you have a clear understanding of how orders execute, how they settle, and how cash moves through your account. The next concern is avoiding common mistakes—the costly mishaps that even experienced investors make on occasion.