For most novice investors – the term T-20 might sound more like a cricketers game than an equity trading term. Here’s a quick overview on ‘T’ trades.
When you purchase an equity stock whether it is via your online trading platform or via your telephone broker – you have options on your ‘trading terms’. The default term is known as a T-3. This essentially means that you are buying the stock on a 3 day settlement. As an example, you purchase stock ‘A’ on Jan 20th, and the full cost of the deal including fees will be debited from your account on day 3 which would be Jan 23rd (assuming no bank holiday’s are involved). The settlement period works on the basis of a ‘working day’ calendar and thus weekends are not included in the settlement period.
The ‘T’ settlement system is widely available via most brokers and the typical periods are as follows: T-3, T-5, T-10, T-20 and T-25. Remember – these are ‘working days’. Therefore, a T-25 is equivalent to 25 working days which can be (depending on the month) a full calendar month ‘extended’ settlement period.
So what’s the advantage? Simple. If you purchase on a T-25, then you do not have to provide the full settlement of the deal until the 25th working day. This effectively provides you with a ‘loan’ facility. However – there’s a catch!
If you make a T-25 trade, then you normally incur a ‘premium’ to the default T-3 offer price. The broker may ask for an extra 1% or 0.5p or 2p etc on top of the offer price. It’s known as a ‘premium’ to the ‘offer’ price. It varies depending on the liquidity of the stock. Active stocks with plenty of daily volume can often offer T-25 trades at the same price as T-3 trades. It changes frequently.
Whilst there are clear advantages in trading on a T-10 or T-20, it’s important to work out whether the advantage gained offsets the premium paid. Furthermore, you must be confident of having the funds in place to meet the settlement date. If you do not have the funds, then you will have to ‘settle’ the trade before the T-xx date. This requires that you sell the stock 3 working days before the settlement date.
Stocks go up and down and there is no guarantee that you can sell your stock for a profit. Therefore, if you’ve purchased a stock for £5k on a T-20 and don’t have the funds to settle, then you have to sell the stock on day 17. If the stock has fallen by 50% in that time period – then you will not have enough funds from the sale to settle the £5k. In effect, you will need to find a further £2.5k to pay your broker. This is the danger and risk involved. That’s why you should always trade within your means and never over stretch yourself. You could lose all that you invest. It’s worth noting that you can ‘sell’ or ‘close’ the T-trade at any time. You do not have to wait until the final settlement date. If you sell a T-20 deal just 2 day’s after it was traded – then your funds (whether debit or credit) will hit your account on the 20th day regardless of you selling 18 days early.
T- trades beyond the usual T-3 settlement periods are usually for more experienced investors/traders who want to respond quickly to changing market conditions.
The term ‘rollover’ often refers to a T-trade that has been ‘rolled over’. Many traders will simply continue the T-trade for a further 20 days once it expires. This means that they have to sell the stock and then repurchase it. You may have observed a 10k sell on the stocks trades list which is then swiftly followed by another 10k purchase. The difference in the trades is sometimes around 0.5% or 1%. This could be a ‘rollover’. The trader or investor has simply continued another T-period. Trading using T-trades can have CGT implications and you should a consult your tax advisor for more information before trading.
1. T-trades allow you to purchase stock at a time when you might not have the funds available to purchase them immediately.
2. An extended settlement allows you greater flexibility of trading. Depending on your broker and your credit worthiness, you can access greater funds than are immediately available to you.
3. Buying and selling equities is subject to fees and tax implications (CGT). A rollover trade will incur fees for buying and selling as well as any stamp duty that may be required.
4. It’s dangerous to over expose yourself and over stretch. You should only invest what you can afford to lose. You should always consult your broker or an FSA regulated financial advisor to discuss your individual circumstances.