By default, almost all accounts (IRA, 401(k), personal, etc.) are set up for securities to be held in "street name." What does this mean for your investment account?
Here's how the Securities and Exchange Commission explains the practice:
When you buy securities through a brokerage firm, most firms will automatically put your securities into "street name." This means your brokerage firm will hold your securities in its name or another nominee and not in your name, but your firm will keep records showing you as the real or "beneficial owner." You will not get a certificate, but will receive an account statement from your broker on at least a quarterly and annual basis showing your holdings.
Get the facts
Nothing is necessarily wrong with street name. Over the past two decades it has become commonplace, but I would still encourage you to get the facts on "Holding Your Securities" straight from the SEC. "Direct" registration can protect your account if a broker dealer or custodian becomes insolvent. Here's how: In a bankruptcy scenario, street name and direct-registration accounts are separated into two piles. Some attorneys advise that securities held in direct registration can be transferred elsewhere faster. Amazingly, securities held in street name could potentially be used to cover other customers' claims while taking longer to transfer.
What's so hard about shuffling some paper?
Aside from street name and direct registration, physical certificates are the only other way to hold securities. Sadly, last year Charles Schwab (NYSE:SCHW) raised its price from $50 to $500 for transacting in physical stock certificates -- a tenfold increase, just like that! Chuck says he's just passing along the cost -- but I'm not buying it. The U.S. is littered with banks and brokerage houses. When they're handling millions of transactions on dozens and dozens of financial products, what's so hard about handling physical stocks and bonds? Back in the day, paper was the only way, but now the practice is headed for extinction.
Physical securities make transactions slower, typically requiring three to 10 days. Because time is money, it seems banks and brokerages would prefer to do away with the tradition altogether. However, I theorize that holding stocks and bonds physically, while not practical for everyone, may have helped some investors talk themselves out of selling at the bottom during the recent financial crisis -- "You mean I have to go into the bank and sit down with someone to sell?!"
Slowing down the process prevents hair-trigger decision-making. Physical stocks and bonds can be easier to borrow against (i.e., use as collateral). They also serve to help retail investors think of the long term.
Just try not to lose them.
A lost art form
Disney (NYSE:DIS) is just one example of a publicly owned company that used to offer its shareholders the option of holding beautiful, frame-worthy stock certificates. But on Oct. 16, 2013 Disney did away with its long-standing tradition.
How many parents will miss out on the opportunity to hang one of these colorful certificates on the wall in the nursery room? For years, they helped parents introduce their young'uns to investing. However, as a consolation prize, Disney will still offer a certificate of acquisition for display purposes.
Bank of America (NYSE:BAC) also did away with its paper stock certificates this year.
These days, many employees at Charles Schwab, Bank of America, and similar institutions would have to dig up a dusty training manual if a customer came in looking to sell an old paper certificate.
Wall Street prefers "street name" -- but you may not
Holding stocks in street name does come with certain conveniences for customers, such as electronic record-keeping, fast transaction times, and funds available on settlement. However, direct registration offers most of the same conveniences while increasing account protection (through transparency, as owners are registered directly on issuer's books) in the event a broker dealer or custodian experiences financial problems. Let's hope that never happens, but if it does, do you really want to wait around for the Securities Investor Protection Corporation to sort through a pile of beneficial owners? If you're holding securities in street name, you may have to.
Daniel Cook has no position in any stocks mentioned. The Motley Fool recommends Bank of America and Walt Disney. The Motley Fool owns shares of Bank of America and Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.