What is Settled Cash?
Settled cash refers to the amount of money an investor has available in their brokerage account that can be used to purchase securities. It is the cash balance that results from completed transactions, meaning the money has been officially received following the settlement period.
When you place a trade to buy or sell securities like stocks or options, the transaction takes a few business days to complete, known as the settlement period. During this time, cash from sales is considered “unsettled” until the settlement is finished and the funds can be used for trading or withdrawn.
Why Settlement Periods Exist
Settlement periods exist due to the time required to technically complete securities transactions between buyers and sellers. For many types of securities, including stocks, bonds, and options, the standard settlement period is 2 business days after the trade executes (T+2).
These T+2 settlement cycles provide time for the exchange of money and securities to occur. Having a buffer period between order execution and cash availability helps reduce systemic risk in financial markets.
Difference Between Settled and Unsettled Cash
- Settled cash refers to money received from completed sales of securities, available for trading or withdrawal.
- Unsettled cash refers to proceeds from a recent sale that is still within the settlement period, not yet available for use.
For example, if you sold stock on Monday, the cash proceeds would be considered unsettled until Wednesday when settlement occurs. You could not use the pending funds to make new trades until they settle.
Why Tracking Settled Cash Matters
Knowing your settled cash balance is critical for avoiding good faith violations when trading in a cash account. Good faith violations occur when you purchase a security without having sufficient settled cash in your account.
Brokers track settled cash to ensure investors are not trading purely on credit or borrowing. Policies are in place to deter excessive speculation. Tracking settled cash yourself helps you trade responsibly within cash account limitations.
Calculating Your Settled Cash
To determine settled cash:
- Add proceeds from trades that have already settled
- Subtract any costs from settled purchases
- Subtract pending uncleared bank deposits
This gives you the exact amount of settled cash available for new trades or withdrawals. Keeping an accurate tally ensures you know what you have available without violating good faith rules.
Here is the formula to calculate settled cash:
Settled Cash = Cash Balance – Pending Uncleared Deposits + Proceeds from Settled Sales – Cost of Settled Purchases
Cash Balance = Total cash currently in your brokerage account
Pending Uncleared Deposits = Funds that have been deposited but not yet cleared into your account
Proceeds from Settled Sales = Cash received from trades that have already settled
Cost of Settled Purchases = The amount paid for trades that have already settled
To calculate it:
- Take the total cash balance in your account
- Subtract any deposits that are pending and not yet cleared
- Add the proceeds (cash) received from sales that have already completed settlement
- Subtract the total cost paid for purchases that have already settled
- The end result is your settled cash balance
This gives you the exact amount of cash available for trading or withdrawing at any given time. Performing this settled cash calculation frequently helps you track your available funds and avoid potential good faith violations when trading in a cash account.
Settles Cash: Example
Here is an example to illustrate the concept of settled cash:
Let’s say you have a brokerage account with a cash balance of $10,000. On Monday, you buy $5,000 worth of XYZ stock. The trade will settle on Wednesday.
On Tuesday, you sell your existing ABC stock for $7,000. This sale will also settle on Wednesday.
Your account activity is:
- Buy $5,000 of XYZ stock
- Sell ABC stock for $7,000
Your settled cash calculation on Tuesday after selling the ABC shares would be:
Cash Balance: $10,000
Minus Purchase Costs: -$5,000 (for XYZ stock purchase)
Plus Sale Proceeds: +$7,000 (from sale of ABC stock)
Equals Settled Cash: $12,000
The $7,000 from the ABC sale is not included in your settled cash on Tuesday since it has not settled yet.
On Wednesday when both trades settle, your settled cash would recalculate to:
Cash Balance: $10,000
No pending unsettled trades
Settled Cash: $10,000
The $7,000 from the ABC sale on Tuesday is now included since the settlement is complete. This example illustrates how settled cash changes over time as trades settle and funds become available for use.
- Settled cash refers to money received after transactions complete settlement.
- Know your settled cash balance to avoid trading violations.
- Settlement periods create a buffer between order execution and cash availability.
- Calculating settled cash involves adding proceeds from settled sales and subtracting costs from settled purchases and pending deposits.