Thought Leadership
Industry Issues
- Overview: Paper vs. Electronic Securities
- Lost or stolen certificates
- When it's time to sell, paperless is easier
Overview: Paper vs. Electronic Securities
Q. Exactly what is a paperless security?
A. A bond, a common stock or any other security that isn't printed on a specific piece of paper and sent to the owner with the owner's name inscribed on it. Instead, ownership records are maintained electronically. Hence, the term "paperless".
Q. So why is that better than having a paper certificate?
A. Because there's no need to send or receive an actual paper certificate, which can easily be lost or stolen. Nor is there a need to buy a surety bond to cover sending the certificates to your broker or bank. In other words, it's easier, cheaper and, if you want to sell the security, usually much faster.
Q. What's a book-entry security?
A. An issue for which paper certificates are not made available to investors. The term "book entry" is sometimes used because any change in ownership is entered into the record-keeping book for the security, but not onto a paper certificate.
Q. But how I can I prove I own company stock if I don't have the stock certificate?
A. You receive a periodic or annual statement, either from your brokerage firm, the company that issued the stock, or its transfer agent. Unlike a physical security, if you lose the statement, it's easy to get another one. Just call up and ask, or send an email.
Q. Isn't it safer to have the actual stock certificate or bond the company issued if you need to prove your ownership?
A. No. It's safer to own a paperless "electronic" security, because there's no certificate to be stolen, lost or counterfeit. There's also no need to rent a safe deposit box or other safe place to keep the certificates. And you don't have to send them in the mail or insure them.
Lost or stolen certificates
Q. What if I can't find my certificates, or they've been stolen?
A. If you've lost your certificates, or they've been stolen, you need to report that. Call your bank or broker who will advise you how to go about replacing them—and how to convert your ownership to paperless registration. But replacing paper certificates is not free. It usually requires a surety bond costing two to three percent of the market value of the securities.
Q. Can I lose a "paperless" security?
A. No. You might misplace or lose the statement from the company or your broker, but that can easily be replaced. A lost paper certificate, on the other hand, requires a set of procedures and the payment of a surety bond, typically at two to three percent of the securities' market value, in order to be replaced.
Q. I have heard that many securities were lost on 9/11. Is that true?
A. Yes, although they were eventually all replaced. Some $16 billion worth of certificates disappeared in the collapse of the World Trade Center towers on 9/11, and it took many months and nearly $300 million in industry costs to replace them. During this period, electronic records were used to ensure the owners of the securities could be identified. Meanwhile, shares held electronically were not harmed at all on 9/11.
When it's time to sell, paperless is easier
Q. Is it easy to sell paperless securities?
A. Yes. If you own your shares through direct registration, all you have to do is call your broker or even the company itself, and a trade can be executed promptly. If you own your shares in street name, one call to your broker and a trade can be completed right away. The whole transaction can be completed in a matter of hours.
Q. What about selling paper stock or bonds?
A. It's harder, typically more expensive, and usually slower. For starters, you have to get your paper stocks out of the safe deposit box or wherever you have them stored, and then deliver them to your broker or insure them so you can send them to your broker. If the shares don't reach your broker within three days of the trade, the trade may not "settle" because your broker doesn't have your shares to exchange for payment. And your broker is likely to charge you additional fees for processing the paper certificates. By the time your certificates are sorted, filed and processed, more days have gone by.