Banking 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 “cash settled” 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 an economic 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 make the concept more detailed, if a person sells shares he owns today, he will settle the transaction in three business days, meaning that within three business days, he will receive the money in his account; the latter is referred to as cash settled.
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 agree on the current date, less any unsettled purchase transfers
- Short capital inflows deciding on the present day
- The inter-day exercisable amount of the available options positions
When funds are transferred from the bank account to the trading account, once the cash has been transferred and deposited into the brokerage account, that cash total will be available. To calculate the money settled, you can use the following formula:
Cash settled values: 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 cash-settled of your securities. You must take the cash you expect and reduce the value of any stock purchases, taxes, fees, commissions, etc.
The term liquidation that you should not confuse
A term that deals with money and its liquidation is not unique; in finance, different words work with these same words, but they have another meaning. That is why in the process, do not confuse the following purposes:
Liquidated cash VS cash available for trading
If you are wondering what the difference is between cash settled VS 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 ready to trade is currently in the report to purchase shares.
Settled cash VS unsettled cash
As previously explained, liquidated cash is the amount used to purchase shares, while unsettled cash is the same amount, but the liquidation period has not yet expired. It is important to remember that there is an estimated settlement period of three days.