Bank transactions, payments, and financial operations have multiple terms and different ways of working. With the incursion of digital wallets and platforms to safeguard money online, specific terms are added to determine certain activities.
To correctly understand how financial operations work, it is important to know the name of the action and how it works within the process. If you are unfamiliar with the subject, the term “settled cash” will not make much sense to you, but it is one of the most common economic activities. We prepared this guide to explain what settled cash means.
What is settled cash?
Settled cash is a finantial term intended to refer to an amount of money available for a person to buy and sell securities in a cash account. One must liquidate cash because the receiver of the funds (trader) must wait for some time to receive the money.
To explain the concept more in details, if a person sells shares that he owns today, the transaction will be settled in three business days, meaning that within three business days, he will receive the money in his account; the latter is referred to as settled cash.
For a trader to purchase shares safely and validly, he must use the cash available in his trading account or the settled cash resulting from other sales.
How to calculate the cash settlement?
Available settled funds are those, generally, that are used for trading and are calculated by following these steps:
- Income from transactions that are agreed on the current date, less any unsettled purchase transfers
- Short capital inflows decided on the present day
- The inter-day exercisable amount of the available options positions
The cash total will be available when funds are transferred from the bank account to the trading account, once the cash has been transferred and deposited into the brokerage account. To calculate the money settled, you can use the following formula:
Settled cash value: cash value at the time of settlement – (all purchases at the time of trading + brokerage commission + taxes + fees).
With this formula, we analyze that to calculate the settled cash of your securities. You must take the cash you expect and reduce the value of any stock purchases, taxes, fees, commissions, etc.
The term “settled” that can be confusing
A term refers to money deals, called “settled” is not unique. In finance, the same word can be used in different situations, and have another meaning each time. That is why you should be aware to avoid confusing the following:
Settled cash VS cash available for trading
If you are wondering what the difference is between settled cash and cash available for trading, here is the answer. The former refers to the amount of money that can be withdrawn or used from a trading account to buy shares. In contrast, cash available for trading is currently only available to purchase shares.
Settled cash VS unsettled cash
As previously explained, settled cash is the amount used to purchase shares, while unsettled cash is the same amount, but the payment period has not yet expired. It is important to remember that there is an estimated settlement period of three days.