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Understanding Book-Entry (or Paperless) Securities

Posted on Thursday, February 29, 2024 in Financial Management & Trust Services

The organization of your financial records is an important part of executing your overall financial and estate plans. Part of this organizational process includes identifying your assets through the creation of a personal financial inventory. This inventory should include a listing of all assets by name and where they are located, including your securities.

In the past, investors were issued paper certificates for their securities; and those documents were typically stored in a safe deposit box. Today, securities are tracked electronically, rather than in paper form, allowing investors to trade or transfer securities without having a paper certificate as proof of ownership.

The contemporary method of tracking ownership of securities where no physical security is given to an investor is called the “book-entry system.” Several terms are often used interchangeably with “book-entry” shares, including “paperless shares,” “electronic shares,” “digital shares,” “digital stock certificates,” and “uncertificated shares.” Simply put, book-entry securities are investments such as stocks and bonds whose ownership is recorded electronically.

There are several benefits of the book-entry system versus holding physical certificates in your possession.

Safe electronic storage. One benefit of book-entry ownership is the elimination of problems associated with the storage and safety of paper certificates. For example, if a stock certificate is lost or destroyed it can be replaced, but sometimes not without a substantial fee. Book-entry ownership alleviates the risk of losing your certificate.

No physical paper to transfer. Book-entry ownership also eliminates the requirement for physical movement of certificates at the time of sale or transfer of ownership.

Simplification of the security transfer process. Book-entry securities do not move from owner to owner, instead, they are held in a central clearinghouse or by a transfer agent, as ownership changes. Therefore, it’s very easy to move the stock to your broker of choice within the trade settlement period. Shares can also easily be gifted or reregistered electronically when held in book entry.

Streamlines your recordkeeping. Typically, a periodic statement of account is provided to the holder of book-entry shares reflecting the number of shares registered in the owner’s name held by the company, broker, or custody agent. Because of the ease and cost effectiveness of book-entry ownership, many companies no longer issue physical certificates.

Today, it’s difficult to imagine the modern stock and bond markets operating in the absence of a book-entry system. The conversion of securities from physical to book-entry form was a major development in the history of the market and very beneficial for consumers.

As you prepare your asset inventory, be sure to identify the paper certificates you may still have stored, as well as the name and number of your brokerage accounts where electronic records are stored for book-entry securities.

Contact us today regarding any questions or to schedule an appointment.

Nick Johnson

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