I have a technical question regarding settlement date which I suppose requires a deeper understanding of the way the system works. I want to know, if I buy a share on a particular day, will I become liable for the bought shares immediately or will I only become liable for those shares after the settlement date? Conversely, if I sell shares on a particular day, will I hand over the liability of the shares (responsibility of the shares/stocks) immediately or will I retain liability of the stock until the settlement day? By liability, I mean, If something were to happen to the shares, who would be responsible? I know that ownership changes hands after the settlement date, but I specifically want to know about the liability/responsibility of the shares. Will that be transferred immediately or only after the settlement date? JH
As I understand it, a trade is the process of signing a contract transferring the ownership and responsibilities between parties. So you wouldn’t be responsible for anything after selling the stock, prior to settlement date. The settlement date is just the time or finalizing the payment. This should be similar to selling a house or a car, where as soon as you sign the contract and transfer the title to the house or car, it belongs to someone else, while the payment may be handled separately and sometimes take couple days to clear as well. Possibly the transaction could be reversed only if the payment couldn’t be cleared, but even then the buyer’s broker is responsible for making sure the buyer has sufficient fund to pay for shares purchased from you. However, exceptions are always possible and I’m not sure if/when unsettled stock transactions could be reversed. Though even if so, you’d have to be extremely unlucky for a transaction being unable to settle due to something wrong with the buyer or trade/transaction itself, and at the same time something also happening to the stock or company.
Hmm, thanks for that. I am looking to find out in a definitive way, maybe from the clearing house as to when the liability transfers. Appreciate the help, JH
Liability - depends Preferred stock or common? Bought listed or pink sheet? Cash/Margin or Custodial account? Broker self-clearing or using a clearing firm? So before this turns into a total fishing trip is your concern price action between trade and settlement or does relate to another issue?
Do any of these things make a difference when it comes to determine who has liability between the trade and settlement dates?