A stock certificate is a piece of paper issued by a company to shareholders as proof of ownership of a share of the company.
What Is a Stock Certificate?
The stock certificate is a physical proof of a holder's stock ownership. It includes essential information such as:
- The shareholder's name
- The date the shares were issued
- The number of shares issued
- The type of stock owned
- A unique certificate identification number (CUSIP)
- A signature of the person with the authority to issue the certificate
Each certificate is embossed with a corporate seal.
Stock certificates are typically printed on specially prepared paper with intricate designs, much like our paper currency, to make it difficult to replicate or counterfeit. Stock certificates issued by some companies were considered works of art, often adorned with elaborate designs and ornate engravings as part of their branding. That's why some people frame their certificates and display them prominently in their homes or offices.
For example, stock certificates issued by the Disney Corporation included full-color depictions of their famous characters, making them suitable for framing and displaying in their children's rooms.
How Stock Certificates Are Used
The primary use of stock certificates was to represent an investor's share of ownership in a company. Before the electronic age, they were the only proof of ownership an investor had. When investors wanted to sell their stock, they would have to turn in their stock certificate to a broker who would then send it back to the company.
Since issuing stock certificates was replaced by electronic recordkeeping, there is no longer a practical use for them. These days old certificates are sometimes kept as a memento or collectible. Rare stock certificates can have significant value among people who collect old stock certificates.
If you do come across a stock certificate from a company that is still in business, you can check to see which state the company was incorporated in, and then inquire whether the company still conducts business there. You can then contact the company's transfer agent for instructions on how to register the stock in your name. Once in your name, you can sell the stock through a broker or the transfer agent.
Tip: Although companies no longer regularly issue stock certificates, old certificates may still have value, even if the company has merged or been acquired.
The History of Stock Certificates
The first known stock certificate was issued in 1606 by the East India Company to finance its commercial trading operations. The trading of stocks dates back to at least 1602, when the Amsterdam Stock Exchange was created to trade stocks issued by the Dutch East India Company. Large shareholders of East India Company stock certificates became very wealthy-on paper. But, when the company's business practices came into question, the certificates became worthless. As a result, the British government banned the issuing of shares until 1825.
The exchange of shares of stock became prevalent with the creation of the New York Stock Exchange (NYSE) in 1792, which is now the largest and most influential stock exchange in the world. The issuing of stock certificates reached an apex during the frenzied trading right before the Stock Market Crash of 1929. Following the crash, more than 40% of the paper value of common stock evaporated, and large numbers of companies went out of business during the crash and the ensuing Great Depression. During that period, a common use of stock certificates issued by defunct companies was as wallpaper, often covering entire walls of a former shareholder's home.
One of the last issued paper stock certificates was from the Walt Disney Company in 2013, even though electronic-entry systems replaced stock certificates in the 1990s.
Physical vs. Electronic Stock Certificates
Today, few companies issue paper stock certificates, relying instead on electronic book-entry methods to record and track stock ownership. When shares of stocks are purchased, there is no physical exchange of securities. Instead, an accounting entry is made by the financial institution handling the purchases or sales of securities on behalf of investors. The securities can be registered in "street name," which is the name of the brokerage firm holding the security for you in book-entry form. Or it can be registered directly with the issuing company. All parties, including the company issuing the shares, the financial institutions, and investors, benefit from this streamlined process because it's more efficient, safer, and less costly.
However, some investors prefer to have a physical stock certificate as evidence of their ownership. Although companies are not required to issue paper stock certificates, many will do so upon request.
How To Obtain a Stock Certificate
The easiest way to obtain a stock certificate today is through the broker who sold you the shares. They retain the information pertaining to the sale of the shares, including the contact information of the company's transfer agent, who is responsible for issuing the stock certificate. Most brokers charge a fee for this service, which can run as high as $500.
Alternatively, you can take a more direct route by going through the company's transfer agent. However, this can be a time-consuming process. You can find the transfer agent's contact information on the company's annual report, which is usually available on the company's website.
Pros & Cons of Holding a Physical Certificate
- The issuing company will be able to notify you directly with company news and other information that can impact your shares.
- Instead of having any dividends deposited in a brokerage account, they will send them directly to you.
- You can pledge physical stock certificates as collateral for a loan.
- You have to send the certificate to your broker or the company's transfer agent to sell the shares, which can preclude a quick turnaround of funds.
- If you lose your certificate, you may have to pay a fee to replace it.
- If you move, you need to contact the transfer agent with the address change so you don't miss any notifications.
Important: A major shortcoming of physical stock certificates is that, unlike electronically held shares, they cannot be sold at a push of a button. However, physical stock certificates can be deposited into brokerage accounts, thereafter giving the owner the opportunity to sell the shares quickly.
This article was written by
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