When an investor buys a security, he must receive evidence of ownership as there are no material assets to account for the purchase. Historically, this evidence has been a paper stock certificate issued in the name of the investor, showing the number of shares he owns. But paper certificates have become obsolete, replaced by electronic records.
When you buy a stock, a stock registrar creates a record on registrar books showing you as the owner of X number of shares. Since no physical evidence is produced (other than a trade confirmation and an account statement), the record is in book entry form only.
Stocks Held in Street Name
An investor who purchases a stock can still request through his broker that a stock certificate be issued in his name and mailed out to him, but companies are no longer required by law to issue paper stock certificates, and many opt to have book entry form shares only. Brokers may also charge high fees for issuing paper stock certificates. Stocks held in a brokerage account are registered in the broker’s name (street name), and the broker shows them as owned by particular clients. Keeping stocks in the brokerage account, registered in street name, is now standard practice. Again, evidence of ownership exists in book entry form only.
Direct Stock Purchase Plans
Many companies sell shares of their stock directly to investors, who can purchase small amounts on a regular basis and reinvest dividends free of charge. This practice involves fractional shares that can only be accounted for in book entry form -- no certificates are issued.
The book entry form offers several advantages: no lost or damaged certificates, no costs or delays associated with the issuance, instant buying and selling, including day-trading, and multiple electronic entries and back ups to verify/prove ownership.
Investors may still request physical certificates. Some old stock certificates have become collector’s items and are worth more than the shares they represent. For example, an old Standard Oil certificate may have a signature of John D. Rockefeller or a Playboy certificate may feature a pinup girl in the vignette.
Based in San Diego, Slav Fedorov started writing for online publications in 2007, specializing in stock trading. He has worked in financial services for more than 20 years, serving as a banker, financial planner and stockbroker. Now working as a professional trader, Fedorov is also the founder of a stock-picking company.