If you or your broker trade on the stock exchange, then it is very important that you understand settlement periods. The day on which you buy or sell securities is the transaction date. But in the case of most securities, and stocks in particular, the trade is not actually performed until the settlement date. The settlement period is the time between the transaction date and the settlement date.
This settlement period is usually shown as “T+(number of days till settlement)”, with “T” being the transaction date and the number indicating the settlement period. So T+3, for example, means that the settlement date is 3 days after the transaction date.
The Swiss stock market SIX has a T+2 settlement period, so you receive the money for your trade 2 days after you perform the trade. This same T+2 settlement period applies in the United Kingdom (the London Stock Exchange, for example), Germany, Austria, France, Holland, Belgium, Sweden and Denmark.
If you or your broker trade on U.S. exchanges, you will have to count on a T+3 settlement period. A T+3 settlement cycle also applies to stocks traded on many Chinese stock markets. In other countries, settlement periods can be a lot longer.
This isn’t a huge problem for long-term investors who hold onto their securities over several weeks or months. But settlement periods put frequent traders in a very difficult position because once they purchase and sell securities, their capital is tied up until the end of the settlement period. Unless they have enough additional capital to continue trading until their trades clear, they will have no choice but to wait out the settlement period before they can make another trade.
Many brokers offer secured loans which allow traders to get credit in order to buy securities. The securities which you buy provide the collateral for the loan. Understandably, most brokers will only provide this credit for purchases of highly liquid assets – like high-demand stocks – which they can easily sell to recuperate at least part of possible losses.
In Switzerland, brokers offer this credit through securities-backed “Lombard loans”. These loans are secured using the securities you purchase as collateral. Limits may adjust automatically to match your collateral, or they may have to be changed manually. This will generally be decided by your broker.
Some brokers also require that you borrow a minimum amount of money when you take out a Lombard loan. Most brokers automate the process of receiving secured loans on demand by providing revolving credit, so that you can focus on trading without having to apply for a new loan before each trade.
In the U.S., day traders can make use of a “margin account”. This works very similar to a Lombard loan and allows you to trade on credit, using loans which are secured by the securities you purchase.
Important: If your securities lose in value, they may no longer provide sufficient collateral for your loan. When that happens, you will need to provide additional capital to balance your secured loan.
You should be aware that Lombard loans, margin accounts, and their equivalents in other markets generally cost you money in the way of interest charges. Interest rates for securities-backed Lombard loans are variable and change with market rates.
Although Swiss interest rates are currently low, if you perform many daily trades on credit, the interest you pay on your revolving Lombard loan can take a bite out of your profits.
If you want to trade on a daily basis without taking on loans, your options are very limited. The only alternatives are to limit the frequency of trades (to the end of each settlement cycle, for example) or to invest only small portions of your assets in each trade – leaving you with enough capital to make further trades.
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