Options on Securing Your Securities

Some of the first questions that newbie investors ask pertain to holding their securities. What are the main ways by which an investor can hold his securities? What are the pros and cons of each option?

An investor can secure his securities in three ways. Specifically, an investor can hold his securities through a physical certificate, through street name registration and through direct registration.

The availability of these options depends on the investment instrument. Investors should always ask their brokers/dealers about how newly purchased securities will be held before proceeding with the purchase.

Direct Registration

When you buy securities through direct registration, the company registers the security in your name regardless of whether you brought the security through your broker, through a direct investment plan transfer agent or directly from the company.

Although the securities are being held under your name, you won't receive a physical certificate of ownership. However, you will be mailed periodic annual reports, proxies, account statements, dividend reports, statement of ownership, notifications, and important documents.

Pros of Direct Registration: One of the benefits of holding your securities through direct registration is the fact that you deal directly with the company issuer. The securities are also held in your name and the company will communicate directly with you regarding shareholder reports, annual reports, etc.

Another benefit of direct registration is that it gives you the convenience of selling your securities through your broker. Through the direct registration system, your broker can handle all the necessary procedures, so you can sell your securities without much effort on your part.

Finally, the lack of physical certificates also eliminates the risk of certificate loss. Owners won't have to worry about losing their certificates or about their certificates being stolen.

Cons of Direct Registration: Buying securities through direct registration, however, means that you can only buy or sell such securities at certain intervals. This means you may experience liquidity problems. This also means you have to buy or sell your securities at average market prices and not at specific market prices.

Physical Certificate

When you purchase securities, you may be given a physical certificate to prove your ownership of these securities. You may have to pay an additional amount to get a physical certificate.

Pros of Physical Certificates: Like the direct registration system, you deal directly with the company when you hold physical certificates. This means that the company will send its reports and other important information directly to you.

When you hold physical certificates proving your ownership of specific securities, you will also find it easier to use your securities as collateral if you need a loan.

Cons of Physical Certificates: Perhaps the biggest disadvantage of having physical certificates as proof of securities ownership is the fact that, should the certificates be lost, destroyed or stolen, it may be hard to ask for another copy from the company. Barring any problems though, you will also be charged a fee in order to have new certificates printed for you by the company or its transfer agent.

Another disadvantage is the lack of ease in transferring and selling your securities. To sell or transfer your securities, you'd have to send the physical certificates to your broker or the company's transfer agent. This makes it harder for you to use your securities in cases of emergency.

Street Name Registration

Street name registration is the default registration mode when you buy securities through a brokerage firm. Under street name registration, you will be listed in the broker's books as the owner of the securities, but your name will not be listed in the company issuer's books. Instead, the brokerage firm's or some other nominee's name will be listed in the company's books on your behalf.

Under street name registration, the company issuer will send all notifications meant for you to the brokerage firm. Your brokerage firm, in turn, is responsible for sending such communication to you. Included in the mailings from your brokerage firm are your consolidated tax information, reports on interest payments and information about dividends forwarded to your account.

Pros of Street Name Registration: Perhaps the biggest benefit of having your securities registered through street name registration is the security and flexibility it provides. Since your broker is the one handling your investment for you, you can set up a margin account or place limit orders that directs your broker to sell your securities should the market price hit a certain amount.

Moreover, you wouldn't have to worry about your proof of securities ownership getting lost, destroyed or stolen as in the case of physical certificate registration. Lastly, it will be easier to execute trade orders since all the necessary information needed to process such transactions are already with your broker.

Cons of Street Name Registration: Since you do not communicate directly with the company, pertinent mailings will be routed to your brokerage before being sent to you. This arrangement can lead to delays on the arrival of your dividend and interest payments as brokerage firms may send these according to a set schedule.

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