When you invest in a stock, you might expect that you have instant ownership. This is especially true with modern trading, where everything happens with the click of a button, and there is no need to physically deliver anything to signify that a sale of stock has occurred.
Despite modern convenience, however, there is still a lag time between when you purchase a stock (make the trade) and when the transaction is finalized. Because of this, there is a difference between when you buy a stock and when you become a shareholder of record.
What is a Shareholder of Record?
A shareholder of record is the person who owns a stock. The company keeps track of who owns its stock so that the shareholders of record can receive company updates and payments (dividends) to which they are entitled. When the shareholders are registered with the company, this is called having registered stock. This serves as proof of ownership of stock in the company.
Alternatively, a company can opt to not register shareholders and instead issue stock in bearer form. In that case, the only proof that someone is a shareholder is that he has physical proof that he owns a stock. Because this is easier to tamper with, these types of stock issuances have been mostly phased out.
After a sale of registered stock, the company must update the shareholder information. During the time between when you buy a stock and when the information is updated, you are not a shareholder of record. However, this transition must be made by the settlement date.
What is a Settlement Date?
The settlement date is the date when the sale of a stock must be finalized. For most stock, this is two days after the date of the transaction sale. This is symbolized by "T+2," which means the transaction date plus two business days. When you purchase a stock, you will become a shareholder of record on the settlement date.
T+2 is now the normal standard for a settlement date. However, this wasn't the case until recently. In 2017, the Securities and Exchange Commission changed the rules around stock trades, saying that as of September 5, 2017, sales need to be finalized within two days. Prior to that, traders had three days to settle a sale. In the past, when stock was issued on paper, traders had up to five days to settle a sale. Since most settlements are able to happen more quickly because of technology, the Securities and Exchange Commission felt that this change would benefit the market.