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Kevin Greenard: Know your settlement terms

Get a grip on settlement terms, to help interpret your own investments.
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Kevin Greenard

As technology has evolved, the stock market has evolved with it.

There are only a handful of trading floors that still remain, and paper stock certificates are becoming less and less common as shares are registered in nominee name. Depending on where their investments are held, many individuals can log in to their investment accounts and see the market value of their securities in almost real-time.

Some systems will only show the previous day’s closing market values for investments; however, some, such as Scotia OnLine, will show live data for your investments that is only 15 to 20 minutes behind that of the market.

As individuals log into their online access to view their investments, they will see many different terms. Some of these terms can be used interchangeably. Depending on which platform you use, different terminology may be used altogether.

The purpose of this article is to give the reader some insight into what some of these terms are to help with interpreting your own investments. To illustrate, we will be using the terms from Scotia Wealth Management’s online platform through Scotiabank.

Settlement

What is settlement and how long does it take?

Settlement is the process that occurs when you buy and/or sell securities. Through the settlement process, the buyer and the seller exchange payment for a set quantity of securities at an agreed upon price.

Within Canada, the standard settlement time for most exchange-traded securities, such as stocks and bonds, is trade date, plus two business days. Trade date is often referred to as “T” and two-day settlement is known as “T+2”.

What this looks like is if a security was purchased on Wednesday, March 23 (T) it would settle on Friday, March 25 (T+2). Some securities, such as Money Market, settle in less time at trade date plus one business day, or T+1. If Money Market was sold on Wednesday, March 23 (T) it would settle on Thursday, March 24 (T+1).

In other cases, some securities take longer to settle. This is more commonly found in structured products or alternative investments. Liquidity is very important and before investing in something it is important to know and understand the settlement terms.

For example, Mr. and Mrs. Smith transferred their investments from another financial institution. Part of their investments were held in a Real Property mutual fund. Not only were Mr. and Mrs. Smith paying a high embedded Management Expense Ratio, but the mutual fund was only valued once per month and had T+20 settlement. This fund was a proprietary product, meaning it could only be held at that one financial institution and was unable to be transferred in-kind elsewhere.

In initiating the transfer for the holding in cash, the valuation date was narrowly missed. This resulted in waiting nearly a month for the fund’s next Net Asset Value (NAV) to be calculated before the holding could be redeemed. After redemption, it then took a month (20 business days) to settle before it could be transferred here.

All in all, the transfer process took approximately two months. During this time, the funds could not be used for good investment opportunities or withdrawn if needed — the cash was illiquid. This is one of the many reasons we do not recommend or invest in such securities for our clients and why we stress the importance of understanding the settlement terms prior to investing.

History of settlement

Initially the settlement period was set in the United States by the Securities and Exchange Commission (SEC) to trade date plus five business days (T+5). This was amended in 1995 down to T+3, and again further in 2017 to T+2.

The future of the settlement cycle

With computerization, the regulators in Canada and the United States are pushing to shorten the settlement time frame from T+2 down to T+1. This is anticipated to happen by 2024. With this, any exchange-traded securities would settle the day after they were bought or sold. From a regulatory standpoint, by shortening this timeframe it can reduce counterparty risk and lead to more efficient markets.

Key terms in viewing your investments online

What is trade date cash?

Trade date cash is the cash that is available immediately to be transferred to your bank account, if needed.

What is settlement date cash?

This is the value of the cash in your account that you can access on the settlement date.

What is my total cash balance?

In determining the total amount of cash you have available, you need to assess your trade date and settlement date cash balances, and also add in any money market balances you have. Money market is a cash equivalent and settles in T+1. As money market is purchased and sold, it will show under the different account positions, not under the cash summary balances, but it should be factored into your available cash balances.

What is market value?

This is the current value of the holdings in your account.

What is net value?

Net value is the total of your trade date cash, plus the market value of securities.

What is the withdrawal limit?

A withdrawal limit is how much money you can withdraw from your investment account if you have the appropriate margin account type set up. The interest rates associated with margin accounts are typically higher than other secured credit facilities, such as a Line of Credit (LOC). Margin accounts and balances are also not permitted within discretionary accounts and are only allowed within non-discretionary accounts.

What is estimated buying power?

Estimated buying power is how much cash you have available to buy investments. If you have a margin account, it would also factor your available margin to confirm what your total purchase ability is at the time.

What are account positions?

Account positions are individual securities, such as equities, bonds, or money market balances, that you hold.

What is description?

Description is the name of the security. For example, common shares of Apple will show as “Apple Inc”.

What is symbol?

This is the stock’s symbol that it trades under. It is also known as the “ticker” symbol. Carrying on with the example above of common shares of Apple Inc, the ticker symbol will show “AAPL”.

What is quantity?

Quantity is the number of shares, units, or par value held of that given security.

What is average cost?

Average cost is how much was paid for that given investment per share or per unit. If all the shares were purchased at one time, the average cost would be the price paid on that day. In Canada, average cost is used to calculate the cost for tax purposes, whereas other countries will have a different way to calculate the cost for tax purposes.

If you have never added to a position, then your average cost will be the same as your original cost and may be referred to as average cost or original cost interchangeably. However, when adding to existing positions or trimming holdings that have over-performed, the average cost gets updated to a blended cost per share or unit.

Additionally, some clients have the Dividend Re-Investment Plan (DRIP) set up on their holdings. With the DRIP, rather than receive cash, the shareholder receives the nearest number of whole shares, based on the current market price. This changes the average cost of the security, which we will illustrate using shares of Bank of Nova Scotia.

Mr. Scott purchased 1,000 shares of Bank of Nova Scotia for $50.00 per share. His average cost for these 1,000 shares is $50.00 per share, or a book value of $50,000.

Mr. Scott recently set up the Dividend Reinvestment Plan on his Bank of Nova Scotia Shares and will be receiving his first share distribution. Prior to this, Mr. Scott received dividends in cash. Bank of Nova Scotia pays a dividend of $4.00 per share annually, or $1.00 per quarter.

If the Bank of Nova Scotia is currently trading at $92.00 per share, instead of receiving $1,000 of cash, Mr. Scott will receive approximately 10 shares of Bank of Nova Scotia ($1,000 / $92.00 per share = 10.87 = 10.00 whole shares) and a residual of $80.04 in cash (0.87 x $92.00 = $80.04).

Mr. Scott’s new average cost is no longer $50.00 per share. The cost base of those ten shares at $92.00 each is added to the original book cost of $50,000. The new book cost then becomes $50,920 (10 x $92.00 = $920 + $50,000 = $50,920). Instead of owning 1,000 shares, Mr. Scott now owns 1,010 shares. Therefore, his updated average cost is $50.42 per share ($50,920 / 1,010).

What is market price?

This is the current cost of a security as valued in the market, it is also known as the “bid” price, which is the highest price that buyers are willing to pay for the security. Before using the bid price as an indication of market value, the last traded price was used. As mentioned above, some investment platforms give the price in real-time (typically delayed by 15 to 20 minutes) or as at the close of business the previous day.

What is book value?

The total cost of what you paid for each security you own. This is equal to quantity multiplied by average cost.

What is market value?

This is the current market value for each security you own. It is equal to the quantity multiplied by market price.

What is change in dollars?

The change in dollars, often shown as “change $” is the difference between what you paid for the security (book value) and what the security is currently worth (market value). This is often referred to as the unrealized gain or loss.

The position will be in an unrealized gain if the market value is more than the book cost. On the flip side, if the market value is less than the book cost, the security will be in an unrealized loss position.

What is change in per cent?

This shows the unrealized gain or loss in per cent and is often shown as “change %”. For example, if the average cost of your Apple shares was $100 per share, and it’s currently trading at $165, your change per cent would be 65 per cent ($165 - $100 / $100).

As you can see from the above, there are lots of terms to know when viewing your investments. It is important to know how to view your accounts online and read your monthly statements. If you ever have any questions or are unsure of what something is, our team is happy to review your online or printed statements with you.

Kevin Greenard CPA CA FMA CFP CIM is a Senior Wealth Advisor and Portfolio Manager, Wealth Management with The Greenard Group at Scotia Wealth Management in Victoria. His column appears every week at timecolonist.com. Call 250-389-2138, email greenard.group@scotiawealth.com, or visit greenardgroup.com.