Published by Bob Ciura on April 5th, 2017
Now that we are firmly in the digital age, we are living in an increasingly paperless world.
This is readily apparent in obvious areas. For instance, email has rapidly displaced sending letters in the mail.
But you might be surprised to know that this same dynamic is playing out in the stock market as well.
Indeed, the digitization of paper records now means you don’t actually own your stocks.
This article will discuss the pros and cons of brokerage “street names”.
In the old days, investors who bought shares of stock, or a company’s bonds, received paper certificates.
For example, this is what a stock certificate would have looked like in 1887, issued by Standard Oil–the predecessor to Exxon Mobil (XOM).
Source: Wikimedia Commons
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The full benefits accrue when you own the stock over long periods of time. In the ‘old days’, you could hold your stock certificates and know that you owned shares in great businesses like ExxonMobil.
But in the modern age, this is no longer the case.
In fact, most brokerages nowadays utilize a process known as “Street Name Registration”.
If you buy a stock in XYZ Company, the security is registered in street name and held in your account at your broker.
What this means is that the brokerage firm will record the individual as being the ‘real’ owner, but you will not be listed as the owner on XYZ Company’s books.
Instead, the broker is listed as the owner on XYZ Company’s books.
The broker, meanwhile, lists the investor as the actual owner on its books, through what is known as “book-entry” form.
The investor is still entitled to all dividends and interest payments from any securities owned, and the brokerage firm will still distribute regular mailings such as periodic account statements.
This may send up red flags for the investor, but the process is entirely legal. The U.S. Securities and Exchange Commission permits the practice of street names.
There is also a third option in all of this, which is called “Direct Registration”.
Under the Direct Registration System, the security is registered in the investor’s name, on XYZ Company’s books, and either the company or its transfer agent holds the security for the investor, again in book-entry form.
Like Street Name Registration, Direct Registration also involves electronic bookkeeping.
The main difference here is that the issuing company holds the stock or bond in in book-entry form, instead of the broker.
It allows investors to be registered in their own name on the issuing company’s records, without the need for a physical certificate.
Most brokerages utilize the Street Name Registration process. While it is probably surprising for even the most experienced investors to read this, it should not be viewed as cause for alarm.
Investors can still request paper stock certificates from the issuing company. Many will accommodate the request, although some companies no longer issue physical certificates.
There are many advantages—along with a few disadvantages—of using Street Name Registration versus holding physical stock certificates.
Pros of Street Name Registration
Mainly, the biggest advantages of utilizing Street Name Registration instead of holding onto a real stock or bond certificate, is that it is more convenient.
If investors hold onto physical stock certificates, it exposes them to the risk that the certificate could be lost, stolen, or destroyed.
Using Street Name Registration mitigates this risk.
It also reduces costs of ownership and trading.
Investors who held physical stock certificates typically stored them in a safe deposit box at their local bank, along with their other valuables.
Nowadays, with technology enabling digital ownership, some companies will charge a fee for producing a paper security.
And, if the paper certificate is lost, stolen or destroyed, it can be a time-consuming and costly process to receive a duplicate.
The investor will have to prove that they are the owner, and will likely have to pay a fee for being issued another certificate.
In addition, the investor must buy an indemnity bond to protect the issuing company and its transfer agent, from any claims pertaining to the lost original.
The Securities and Exchange Commission stipulates that these indemnity bonds could cost upwards of 2%-3% of the value of the lost stock.
There is also the issue of liquidity—it is much more difficult to sell a stock if you hold a paper certificate. If you wanted to sell the shares, you would have to send the certificate to your broker for them to execute.
This could take a few days, when online trading now allows for buying and selling stocks or bonds to be executed in a matter of seconds.
Lastly, online bookkeeping allows investors a wider range of trading options.
By utilizing Street Name Registration, investors can set limit orders or trade on margin, which they are not able to do with paper stock certificates.
Cons of Street Name Registration
Clearly, keeping physical stock certificates is not without its headaches.
That said, there are some advantages of the old methods, and some disadvantages of Street Name Registration.
First, the issuing company knows exactly who you are. This can help ease communication between the investor and the issuer.
By being the direct owner of record, the issuing company can reach you directly, and knows where to send all pertinent company reports.
Since the investor’s name is not on the issuing company’s books, it will not mail important corporate communications directly to investor.
Another area in which holding a paper stock certificate could be valuable, is in regards to collateralization.
Investors may discover that it is easier to pledge stock or bond securities as collateral for a loan, if they hold those securities in paper form.
Allowing records to be stored on the Internet, instead of with physical paper copies, can be an intimidating proposition.
After all, finances are one of the most personal and sensitive aspects of life.
However, there is no need to fear Street Name Registration.
In most cases, investors can still receive paper stock certificates held directly in their name, if they so desire.
But for investors who hold a basket of dividend stocks—for example, the Dividend Achievers, a group of 265 companies that have raised dividends for 10+ years—it is much easier to use Street Name Registration.
Using modern-day technology has made our lives easier. As it pertains to investing, it is perhaps the biggest reason why brokerage fees and trading costs have declined so much over the past several years.