Why does it take two days to buy shares?

December 6, 2018

What happens when you buy shares?

Have you ever seen one of those movies where a trader is staring at prices move on a ticker tape and shout down the phone to get somebody to buy at that price?

While the process hasn't changed dramatically, electronic trading has levelled the playing field somewhat because once your order is entered, it can now be processed fairly quickly.

How does sharetrading work today?

When you place an order to buy some shares, you’ll indicate you want to buy at either the current share price (market order) or state a specific or maximum price you want to pay to purchase shares (limit order).

Your order is electronically matched with (a) willing seller(s) of the same shares. Both cash management accounts would get adjusted to reflect the transaction. Money for the shares and any commission goes out of your cash management account and into the seller’s account. The ownership of shares would change at a registry level and appear on your monthly / quarterly share statement.

The period to match buyers and sellers, and complete the transaction used to take up to five business days in New Zealand and Australia. More recently it took three days, and in 2014 submissions were requested to move this to a two day settlement process. This change took effect in March 2016, and is known as the “T+2 settlement cycle”. This generally applies to cash trades made on the New Zealand Stock Exchange (NZX) and Australian Stock Exchange (ASX).

Once the transaction is complete, the shares are available to trade in your account and the sale price (taking into account any currency exchange rate, less any currency exchange fees and commission) is available in the seller’s account.

Is timing important when I buy shares?

What hasn’t changed in sharetrading is the underlying law of supply and demand. When there are more willing buyers than willing sellers, the share price goes up. If you are one of those willing buyers, you will have to enter an offer price higher than the current price or your order will not be filled. The reverse is true when you’re trying to sell shares when their price is decreasing.

The importance and impact order execution can really depend on the circumstances, in particular the type of order you submit. For example, if you are placing a limit order, your only risk is the order might not fill. If you are placing a market order, speed to market becomes increasingly important.

This comes back to your investment strategy. If you're an active trader (who may invest in a number of companies, across very short time frames, for smaller profits) you may focus more on the speed with which he or she can place the trade. If you're a passive investor (who may invest in a smaller number of companies, over a much longer time frame, for a larger profit) you may focus less on speed but on other factors, such as stability of the company(s) and avoiding high, on-going broker fees.

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