Bid, ask, spread and settlement
The answer
At any moment a stock has 2 prices. The bid is the highest price a buyer will pay. The ask is the lowest price a seller will accept. Your trade is agreed within a second and finished 1 working day later, when shares and money actually change hands.
Why this costs you money
Two separate costs live in this article, and most people know about neither.
The first is the gap between agreement and completion. You sell shares on Monday. The money reaches your bank on Tuesday or later. If you sell on a Friday, add the weekend. If a holiday falls in between, add that too. People plan around a sale as if the money is available the same evening, and it is not.
Worse in the other direction: you sell on Monday and buy something else on Monday with the proceeds. In most cases your broker permits this. But you have now made a purchase using money that has not settled, and if anything goes wrong with the first sale, the second trade is exposed.
The second cost is the auction. If you sell shares you do not actually have in your demat account on the settlement day, your sale fails. The clearing corporation then buys the shares in a separate auction session to deliver to the buyer, and charges you the difference plus a penalty.
That happens more often than beginners expect, and the usual cause is innocent. Somebody buys on Monday and sells on Tuesday morning, before the Monday purchase has been credited. In India this is allowed and has a name, but if the Monday delivery fails for any reason, the Tuesday sale fails too. The auction price is frequently far worse than the market price on the day.
How it works
Two prices, always.
The order book has a buy side and a sell side. The best bid and the best ask are the top of each. The gap between them is the spread. Cluster 1 covers what the spread costs you and how to measure it. This article picks up where that one stops: what happens after the match.
The 4 stages after a match.
- Trade. The exchange matches your order and issues a trade confirmation. At this moment you have a contract, not shares.
- Clearing. The clearing corporation works out who owes what. It nets your trades so that if you bought 100 and sold 40 of the same stock on the same day, you owe money for 60.
- Novation. The clearing corporation places itself between the 2 sides. It becomes the buyer to every seller and the seller to every buyer. This is why you never have to know or trust the person on the other side of your trade.
- Settlement. On the settlement day, money moves from buyers to sellers and shares move from sellers to buyers, through the depositories.
T+1 means settlement happens 1 working day after the trade day. Trade on Monday, settle on Tuesday. Weekends and holidays do not count.
The obligation is real. Between trade and settlement you owe something. If you sold, you owe shares. If you bought, you owe money. The clearing corporation collects margin against that obligation, which is why money is blocked in your account before settlement rather than after.
What it tells you, and what it does not
Knowing the settlement cycle tells you when you can use the money and when the shares become freely sellable. That is a planning fact, and it is the one people get wrong.
It does not tell you when you own the shares for tax purposes, and the 2 dates are not always the same. In India, the holding period for capital gains is generally measured from the date of the transaction rather than the settlement date, but the treatment varies by asset and by situation.
It also does not tell you that your money is safe in the meantime. The clearing corporation guarantees the settlement of the trade. It does not guarantee your broker.
The decision rule
Three rules that cost nothing and remove a category of accident.
- Never plan a payment against a share sale on a same-day basis. Sell,
then wait for the credit, then commit the money.
- Do not sell shares you bought yesterday unless you have checked that
they are credited. In your holdings screen, look for the label that separates settled quantity from the quantity still in transit.
- Check the exchange holiday calendar before a long weekend. A Thursday
sale before a Friday holiday settles the following Monday.
If you trade rarely, rule 1 is the only one that will ever matter. It matters a lot, once, at the worst time.
Try this now
Four minutes, tracing 1 of your own completed trades from agreement to completion.
- Open your broker's Reports, Console or Statements area. Find a contract note for a day you traded. It arrives by email as a password-protected PDF, usually on the evening of the trade.
- On the contract note, find the order time, the trade time, the trade number and the settlement number or settlement date. Write the settlement date down.
- Now open your ledger or funds statement for the same period. Find the date on which the money for that trade actually moved.
- Compare the 2 dates. Then compare both against the date you remember pressing the button.
- Now open your holdings screen today. Find the column or label that shows quantity not yet settled, sometimes labelled T1 or in transit. If you have not traded this week it will be empty, which is itself the lesson.
- Finally, open the exchange holiday list for this year and count how many trading holidays fall on a Monday or a Friday.
What you should see. The contract note shows a trade date and a settlement date that are 1 working day apart. The ledger shows the money moving on the settlement date, not the trade date.
Most readers have never opened a contract note. It is the single most detailed document your broker produces, and article 9 uses it again for a different and more expensive purpose.
In step 6, most years contain several holidays adjacent to a weekend. Each of those turns a 1-day wait into a 3 or 4-day wait, and that is the version of this that actually catches people.
Three real cases
1. India's move to T+1, completed 27 January 2023 — a whole market changed its plumbing India moved from T+2 to T+1 settlement in phases from February 2022, starting with the smallest companies and finishing with the largest in January 2023. It was the first major market to complete the transition across its entire listed universe. The practical effect for a retail investor was that money from a sale arrived a day sooner and margin obligations were compressed into a shorter window.
2. The United States move to T+1, 28 May 2024 — the same change, 16 months later The SEC's amendments to Rule 15c6-1 shortened the standard settlement cycle for most US securities transactions from 2 business days to 1. The transition required substantial operational change, particularly for foreign investors who had to fund US purchases faster across time zones.
3. The GameStop episode, 28 January 2021 (United States) — settlement risk is not theoretical Several US brokers restricted buying in a small number of heavily traded shares. Robinhood's chief executive later described a demand from the National Securities Clearing Corporation for approximately $3 billion in collateral in the early hours of the morning, which was reduced after the firm restricted buying in the affected shares. The lesson is uncomfortable and worth learning. Collateral requirements between trade and settlement are a real constraint on a broker, and they can change what you are allowed to do with your own account.
The question that resolves it
A novice asks: when do I get my money?
An expert asks: what do I owe between now and settlement, and what happens if I cannot deliver it?
The first question is about convenience. The second is about the auction penalty, and it is the one that costs money.
What would make this wrong
If the settlement cycle were irrelevant, then shortening it from 2 days to 1 would have changed nothing. It changed a great deal: margin requirements, the funding needs of foreign investors, and the exposure of clearing corporations between trade and settlement.
Two honest limits.
For a long-term investor, the settlement cycle affects 1 thing only — when the money arrives. Everything else in this article is about active trading.
And a faster cycle is not automatically better. Compressing settlement removes time for errors to be corrected and increases the need for pre-funding. India's optional same-day settlement is optional for exactly this reason. The theoretical end point, instant settlement, would remove netting entirely, and netting is what allows the market to settle a very large notional value with a much smaller movement of cash.
In India
Trading in the cash segment runs from 9:15 to 15:30. Settlement is T+1 for all equity shares, exchange-traded funds, real estate investment trusts and infrastructure investment trusts, on the NSE, BSE and MSEI.
Key mechanics:
- Pay-in and pay-out. Brokers must deliver securities and funds to the clearing corporation by a deadline on the morning of T+1. Shares are credited to buyers' demat accounts and money to sellers on the same day.
- Short delivery and auction. If a seller fails to deliver, the clearing corporation buys the shares in an auction and recovers the cost and a penalty from the defaulting seller. The auction price can be materially worse than the market price.
- Optional T+0. SEBI introduced an optional same-day settlement cycle from 28 March 2024 for a limited set of stocks, and it has been extended to a wider group since. It runs alongside T+1 rather than replacing it.
- Selling shares bought yesterday is permitted, but the delivery obligation depends on the earlier purchase settling. This is where most auction penalties come from for ordinary investors.
In the United States
Regular trading runs from 9:30 to 16:00 Eastern time. Settlement for most securities is T+1 since 28 May 2024, cleared through the National Securities Clearing Corporation and settled at DTC.
Three features differ from India in practice.
Free riding and the cash account rule. In a cash account, you must pay for a purchase with settled funds. Buying with unsettled proceeds and then selling before the first sale settles can trigger a good faith violation, and repeated violations lead the broker to restrict the account to settled cash for 90 days. This has no direct Indian equivalent.
Margin accounts remove the problem and add a different one. In a margin account, unsettled proceeds are available immediately because the broker is lending against the position. The cost is interest and the additional obligations of a margin agreement.
Failures to deliver are published. The SEC publishes data on fails to deliver by security. There is no retail-facing auction mechanism equivalent to India's; buy-in requirements under Regulation SHO fall on the broker.
Where they differ, and what that tells you
Both markets now settle in 1 working day. The difference is what happens when somebody fails to deliver, and who feels it.
In India, the failure is resolved by an auction, and the cost lands directly on the investor who failed. It is a visible, individual penalty, and retail investors do trigger it, usually by accident.
In the United States, the failure is handled through broker-level buy-in obligations under Regulation SHO. A retail investor almost never experiences this personally. What a retail investor experiences instead is a cash account restriction for using unsettled funds, which is a rule India does not have.
So each market disciplines the same behaviour at a different point. India lets you sell before delivery and punishes you severely if the delivery fails. The United States restricts the use of unsettled funds up front, and punishes you with a 90-day account restriction rather than a market-price penalty.
The habit that works in both is the same and it is unglamorous. Know which of your holdings are settled before you sell them. In India that protects you from an auction. In the United States it protects you from a good faith violation. The screen that tells you is the same screen in both countries, and almost nobody looks at it.
Carry this
- Two prices always exist. The gap is a cost you pay twice.
- Trade day and settlement day are different days. Plan money against the second one.
- Selling something you have not received yet is how ordinary investors get auction penalties.