What is settlement?
Settlement is the payment made when a transaction is finally settled. When securities are bought, it means that the buyer pays the agreed amount and the seller delivers the shares. Settlement thus marks that both parties have fulfilled their obligations.
The Swedish word likvid is also used in other contexts to describe a company's liquidity, that is, its ability to pay ongoing costs. In securities trading, however, it almost always refers to the payment itself in the transaction.
How settlement works
Here are some common characteristics that make it easier to understand what settlement means in trading:
- Payment takes place when the transaction is completed
- Carried out on the settlement date
- Marks that both parties have fulfilled their obligations
- Can be manual in unlisted transactions
- Differs from the trade date
Once you know these elements, it becomes easier to plan payment and understand when a transaction has actually been completed.
Important to know
Worth bearing in mind
When you invest, it is important to know when settlement is to be paid or when you will receive settlement on a sale. In stock exchange trading this usually happens automatically after a couple of days, whereas settlement in unlisted transactions often requires clear agreements and manual handling.
It is also important to distinguish between the trade date and the settlement date. The price is set on the trade date, but payment only takes place on the settlement date. For unlisted companies, the process can take longer and require signed documents, which makes clear communication and correct documentation essential.
Frequently asked questions
What is the difference between the trade date and the settlement date?
The trade date is when the price is set. The settlement date is when payment is made and the transaction is completed.
How long does it take before settlement arrives?
In stock exchange trading, settlement usually takes place after a couple of banking days. In unlisted transactions it depends on the agreement and handling.
Must settlement always be paid immediately?
It depends on what has been agreed. In listed trading it happens automatically, whereas unlisted transactions can have other deadlines.
What happens if settlement is not paid?
The transaction can be declared void and the counterparty may be entitled to compensation under the agreement.
Is settlement the same as liquidity?
No. Settlement is a payment in a transaction. Liquidity is about a company's ability to pay its costs.