Trade Settlement and Corporate Actions
About This Lesson
This chapter covers two mechanics the SIE tests heavily and recently rewrote: when a trade actually settles, and what happens to your shares when a company splits its stock or takes other corporate action. The settlement rules changed in 2024, which makes them prime exam material, so it is worth getting the timing exactly right.
What you'll cover
- Regular way settlement at T+1, cash settlement, and settlement by security type
- When-issued trading and good delivery requirements
- How the ex-dividend date, record date, and settlement line up under T+1
- Forward and reverse stock split math, and the effect on open orders and options
- Tender offers, rights offerings, proxies, and spin-offs
The detail most likely to show up: regular way settlement is now T+1, one business day after the trade, shortened from T+2 in 2024. Cash settlement is the same-day exception.
Settlement Timeframes
Settlement is the moment a trade is finished: the buyer's cash is delivered to the seller and the securities are delivered to the buyer. The clock that matters is the settlement cycle, counted in business days from the trade date.
- Regular way settlement is T+1, one business day after the trade date. This is the standard for most securities, including stocks, corporate and municipal bonds, U.S. government securities, and options.
- Cash settlement is T+0, the same day as the trade. It is the exception, used when a buyer or seller needs the cash or the securities immediately, and both sides have to agree to it.
The headline change to remember: regular way settlement moved from T+2 to T+1 in 2024, shortening the cycle by a full business day. The exam treats this as a recent-rule favorite.
The timeframe is only part of the story. The exam likes to test settlement by security type, and the one case that has no fixed date at all.
| Security | Settlement |
|---|---|
| Stocks, corporate bonds, municipal bonds | T+1 (regular way) |
| U.S. government securities (T-bills, T-notes, T-bonds) | T+1 |
| Options | T+1 |
| Cash trades | T+0 (same day) |
| When-issued securities | No set date, settle when issued |
When-issued trading
Some securities trade on a when, as, and if issued basis before they formally exist, so there is no settlement date until issuance actually happens. You will see this with new municipal bond issues, Treasury auctions, and the gap between a stock split's announcement and its distribution. A when-issued trade simply settles once the securities are issued.
A trade only settles if the seller delivers the securities in proper, transferable form, known as good delivery. Three requirements come up:
- Proper denomination: stock certificates must be in units that add up to round lots, 100 shares or multiples thereof.
- Proper endorsement: the certificate must be signed by the registered owner or accompanied by a separate stock power.
- Legal transfer: special situations such as an estate require supporting documentation, like a death certificate or court order, before the shares can change hands.
If what arrives is not good delivery, the receiving firm can reject the trade with a DK notice, short for "Don't Know," which has to be resolved before the trade can settle.
What is the regular way settlement period for corporate stock purchased on a Monday?
Regular way settlement for listed equity securities is:
Ex-Date, Record Date, and Settlement
Because regular way settlement is T+1, a trade settles one business day after the trade date. To be the shareholder of record on the record date, you must buy at least one business day before it, so your trade settles in time.
That timing puts the ex-dividend date on the same business day as the record date under T+1. Under the old T+2 cycle, the ex-date fell one business day before the record date. Buy on the ex-date now and your trade settles the next business day, after the cutoff, so the seller keeps the dividend.
The ex-date is set by FINRA, not the company. On the ex-date, a stock's price typically opens lower by approximately the dividend amount.
- Regular way settlement = T+1 (since May 2024). Trade on Monday, settle on Tuesday.
- Ex-dividend date = the first day the stock trades WITHOUT the dividend. Buy before this date to get the dividend.
- The ex-date is set so that buying before it allows settlement by the record date under T+1.
- On the ex-date, the stock price is adjusted downward by the dividend amount.
Stock Splits
Split math is a reliable source of easy points, and it rests on one rule: a split changes your share count and your price per share, but never the total value of your position.
Forward splits
In a forward split you end up with more shares at a lower price. A 3-for-1 split turns 200 shares at $90 into 600 shares at $30: multiply the shares by three, divide the price by three, and the value holds at $18,000.
Reverse splits
A reverse split does the opposite, fewer shares at a higher price, and companies often use one to lift a low share price back above an exchange's minimum listing requirement. A 1-for-4 reverse split turns 400 shares at $5 into 100 shares at $20, again leaving the $2,000 value unchanged.
Effect on open orders
An existing open order, such as a GTC limit, is handled according to the type of split. For a forward split (for example 2:1 or 3:1) the order is adjusted, with both the price and the share quantity changed to preserve the same total value. For a reverse split, all open orders are canceled instead.
Effect on options
Listed options are adjusted too. After a 2-for-1 split, a single $50 call becomes two contracts with a $25 strike, so the aggregate value the contracts control stays the same.
Part B: You own 500 shares at $4. The company announces a 1-for-5 reverse split.
An investor owns 300 shares of ABC stock at $60 per share. The company declares a 3-for-2 stock split. After the split, the investor will have:
An investor owns 200 shares at $90 before a 3-for-1 stock split. Immediately after the split, which of the following is correct?
Corporate Actions
Beyond splits, a company can take several actions that affect its shares, and the SIE expects you to recognize each by name.
- Tender offer: a public bid to buy shares directly from existing holders, usually at a premium to the market price, often as part of a takeover or a move to take the company private.
- Rights offering: existing shareholders receive rights to buy new shares, typically below market price, before those shares are offered to anyone else. Rights let holders preserve their proportional ownership and avoid dilution.
- Proxy: a shareholder's authorization for someone else to cast their vote, which is how holders vote on corporate matters without attending the meeting in person.
- Spin-off: a company hands shares of a subsidiary to its existing shareholders, creating a separate company that trades on its own.
The table below pulls together how the most common corporate actions affect your share count, your price per share, and the total value of your position.
| Action | Effect on Shares | Effect on Price | Effect on Value |
|---|---|---|---|
| Forward split (2:1) | Doubles | Halves | Unchanged |
| Reverse split (1:4) | Quarters | Quadruples | Unchanged |
| Stock dividend (10%) | Increases 10% | Decreases proportionally | Unchanged |
| Cash dividend | Unchanged | Drops by the dividend amount on the ex-date | Decreases by the dividend paid |
| Rights offering | Increases if exercised | Dilutes existing holders | Neutral if rights are exercised |
| Spin-off | Adds shares of the new entity | Parent price adjusts down | Neutral at distribution |
Chapter Essentials
Regular way settlement is T+1, one business day after the trade date, for nearly everything: stocks, corporate and municipal bonds, U.S. government securities, and options. Cash settlement is the same-day (T+0) exception, and when-issued trades have no set date until the securities are issued. Because settlement is T+1, the ex-dividend date now falls on the same business day as the record date: buy before the ex-date (at least one business day before the record date) to receive the dividend, and the stock opens lower by about the dividend amount on the ex-date.
Corporate actions never change a position's total value. A forward split gives more shares at a lower price and a reverse split fewer shares at a higher price, with value held constant either way (in a 3-for-1, 200 shares at $90 become 600 at $30). Know the others by name: a tender offer bids for shares at a premium, a rights offering lets existing holders buy new shares below market and avoid dilution, a proxy authorizes someone to vote your shares, and a spin-off distributes a subsidiary as a separate company.
Settlement dates by security type, stock split math, and ex-date rules.
The reliable gotchas in this chapter:
• Regular way is T+1, cash is T+0. Since 2024, most securities settle one business day after the trade, so a Monday trade settles Tuesday. Only cash settlement is same-day, and it requires both sides to agree.
• Under T+1, the ex-date equals the record date. They fall on the same business day now, not one day apart as under T+2. You still must buy before the ex-date to collect the dividend.
• Splits never change total value. Multiply shares and divide price by the ratio, or the reverse for a reverse split; the dollar value before and after is identical. A 3-for-1 on 200 shares at $90 gives 600 shares at $30.
• Even splits adjust open orders; uneven splits cancel them. A 2:1 or 3:1 split adjusts both the price and quantity of an open order, while an uneven ratio like 3:2 typically cancels it.
• Options adjust after a split too. A 2-for-1 split turns one $50 call into two contracts with a $25 strike, keeping the aggregate value the same.
• When-issued trades have no settlement date. They settle only once the securities are actually issued, common with new muni issues and Treasury auctions.
Test yourself with exam-style questions on this topic.