Future Business Leaders of America (FBLA) Securities and Investments Practice Test

What does T + 3 signify in trading?

1. The settlement occurs two days after the trade date

2. The settlement occurs on the trade date

3. The settlement occurs three business days after the trade date

4. The settlement occurs one day after the trade date

The correct answer is: The settlement occurs three business days after the trade date

T + 3 refers to the settlement of a securities transaction, indicating that the settlement occurs three business days after the trade date. In the context of trading, the "T" stands for the trade date, which is the day when the transaction is executed. The "+3" denotes the additional three business days required to finalize the transaction, which includes the transfer of securities from the seller to the buyer and the corresponding exchange of funds. This three-day settlement period was traditionally used for most securities transactions and provided a time buffer for various administrative processes. Understanding this concept is crucial for investors and traders, as it affects liquidity, cash flow management, and transaction timing in the securities market. The shift to a T + 2 settlement cycle for most securities in recent years reflects the industry's effort to streamline processes and reduce credit risk. However, T + 3 remains relevant in certain contexts and historical discussions. Other answers misconstrue the definition of the T + number framework by suggesting shorter settlement periods or same-day settlements, which do not reflect the standard practices for securities settlements.