Settlement, Fees, and Fractional Shares

Why this matters

These are the practical details that don't make headlines but affect every investor: when the money from a sale is actually yours, what you're paying to invest, and how to invest when a single share costs more than you want to spend.

Settlement: when a trade is final

When your order fills, you've agreed to a trade. Settlement is when the shares and the money actually change hands. The day you trade is the trade date. The day it settles is the settlement date.

Since May 28, 2024, most US securities trades settle one business day after the trade date, a cycle called "T+1." Before that, the standard since 2017 was two business days, or "T+2." Under T+1, if you sell shares on a Monday, the trade settles on Tuesday.¹²

For most long-term investors, settlement matters mainly when you need the money from a sale: the cash becomes fully available once the trade settles.

The costs of investing

Commission-free trading is common now, but investing still has costs. The main ones:

• Commissions. A commission is a fee for placing a trade. Many firms charge none for stocks and ETFs, but some do, especially for other investments or for trades placed with a person's help.
• Fund expenses. Every mutual fund and ETF has an expense ratio, a yearly cost taken as a percentage of your money in the fund. You never see a bill; it's taken out of the fund's returns.
• Account and transfer fees. Some firms charge yearly account fees, or fees to move your account elsewhere.
• Sales charges. Some funds charge a fee when you buy or sell, often to pay the professional who sold them.³
• The spread. As Bid, Ask, and the Spread showed, buying at the ask and selling at the bid is a cost on every round trip.

Fees reduce the amount of money in your account that's earning a return, so even small ongoing fees can have a large effect over time.³

Two investors each put $10,000 into funds that hold the same investments, which earn a hypothetical 6% a year before fees. One fund costs 0.1% a year, the other 1% a year. Neither adds more money for 30 years.

	0.1% yearly cost	1% yearly cost
Return after costs	5.9% a year	5% a year
Value after 30 years	$55,831	$43,219
Difference	$12,612

A cost difference of less than one percentage point a year ends up costing more than the original $10,000 investment. That's Compounding working against you: every dollar paid in fees also loses all the growth it would have earned.

To compare what a brokerage firm or adviser charges, firms that work with individual investors publish a relationship summary called Form CRS, which you can search for on Investor.gov.³

Fractional shares

A fractional share is less than one full share. If a stock trades at $400 and you want to invest $100, fractional share investing lets you buy 0.25 of a share. You can usually place these orders in dollars ("buy $100 of this stock") or in shares ("buy 0.25 shares").⁴

Fractional shares make it easier to invest small, regular amounts and to spread money across more investments. But there are limits to know about:⁴

• Not every brokerage firm offers them, and those that do may not offer them for every stock or fund.
• If you move your account to another firm, you may have to sell your fractional shares first, which could create a taxable gain.

Key takeaways

• Most US trades settle one business day after the trade date (T+1).
• Costs include commissions, fund expense ratios, account fees, sales charges, and the bid-ask spread.
• Small yearly costs compound into large amounts over decades.
• Fractional shares let you invest by dollar amount, but availability and transfer rules vary by firm.

Check your understanding

You sell shares on a Wednesday that isn't a holiday. Under T+1, when does the trade settle?

1. Wednesday, immediately.
2. Thursday.
3. Friday.

Two index funds track the same index. One charges 0.05% a year and the other 0.75%. What's the most likely long-term result?

1. They'll end up about the same, since they hold exactly the same stocks in the same amounts.
2. The more expensive fund will do better, because it costs more.
3. The cheaper fund will likely end up noticeably ahead, and the gap grows with time.

What's next

With an account open and money in it, protecting it matters. The next lesson, Keeping Your Account Safe, covers what SIPC does and doesn't cover, and how to guard against account takeovers and scams.