Summary - A security, such as a common share of stock, held in street name is industry slang for a security that is held by the brokerage firm that sold the stock, but is legally owned by the investor who purchased it. When a security is held in street name, the buyer of the security is considered the legal (or beneficial) owner. The practice of a brokerage firm holding a security in street name is a common practice in the industry. Investors can if they desire either request the physical certificates from their broker (this will typically make the trade more expensive) or they can request to be directly registered with the company that is issuing the security. In this case, the investor will still not own the physical stock certificates, but their name, and not the name of the brokerage firm, will be recorded by the company as the owner of the stock. This is called direct registration.
For a brokerage firm, holding securities in street name is far more convenient to ensure both timely, and cost-effective, trades. Virtually all brokerage houses hold a large quantity of securities electronically. If a client needs to buy or sell individual securities, the broker is easily able to allocate a portion from their available inventory. This would become more complicated if the investor were to own the individual certificates because the broker would have to identify the specific certificates that were registered to a specific owner, send them to the issuing company, and wait for the names to be changed before the trade could be executed. This would add both time and expense to the trade.
For many investors, having a security held in street name makes trading more efficient and convenient. It also puts the responsibility for securing the individual certificates associated with a security in the hands of a broker. And although an investor may not receive corporate communications directly from the issuing company, their brokerage firm will forward them pertinent information – most of which is available online anyway.
In the event an investor is looking to own a security for a specific reason, for example in order to collect a dividend, they need to ensure they execute their trade at least three trading days prior to the date they need to be the owner of record (the ex-dividend date in the case of a dividend). This will ensure that they will be not just the physical owner of the security but the owner (albeit not the holder) of record on the ex-dividend date.
Introduction
A share of stock represents a piece of ownership in a company. By owning stock in a company, shareholders are entitled to a share of that company’s profits. They also share the risk when a company’s stock price declines. Companies issue shares as a way to raise capital, particularly when they are in a growth phase. The outstanding shares that are available for the general public to purchase are referred to as common shares.
All common shareholders must be registered by the company. In some cases, this ownership will take the form of a stock certificate that contains the name and address of the shareholder. However, in some cases, the holder of record and the stock owner are different. This is frequently the case when an individual investor (sometimes called a retail investor) purchases shares through a brokerage house or as part of an employer-sponsored plan. In this case, the investor owns the shares, but is not considered the holder of record. In this case, the shares are said to be held in “street name” by the brokerage house.
This article will break down what it means to hold a stock, or security, in street name. In addition to providing a definition and example, the article will review the advantages and potential disadvantages to owning a security in street name. We will also discuss why having a security held in street name provides neither an advantage nor disadvantage when it comes to the SEC’s T+2 Settlement Date rule.
What does it mean to hold a stock in street name?
To have a security held in street name means an investor, although the real (or beneficial) owner of the security will not have their name listed with the company’s books. For example, an investor who uses TD Ameritrade as their brokerage firm to purchase 100 shares of AT&T (T) stock will typically not take possession of 100 physical stock certificates from AT&T. Instead, AT&T will have those shares recorded as belonging to TD Ameritrade. The investor, while not the “holder of record” is still considered to be the beneficial owner as it relates to any dividend payments, interest payments and capital gains that occur while they own the stock.
For most brokerage houses, an investor’s purchases of a security are considered to be held in street name unless the investor provides the broker with specific instructions that specify different intentions. When investors have a security held in street name their broker is responsible for delivering to them an account statement on at the very least an annual basis (usually quarterly and frequently monthly) that gives them an overview of their holdings.
Having a security held in street name has become one of the most common ways for investors to hold their securities. The other ways to hold a security are taking possession of the physical certificate or by requesting direct registration. In this case, the investor still does not have possession of the physical certificate, but their name – not that of their broker – is listed with the company or its transfer agent.
Having securities held in street name makes it easy for investors to open or close positions and reduces transaction costs. To illustrate this in a different context, think about selling a car. No matter, how much you charge for the car, there has to be a transfer of a physical title. Without that transfer, the car is still legally in your name. It’s the same way with stocks and other securities. When an investor holds the physical certificate for a security – let’s say a stock certificate – and wants to sell that stock, the broker will be obligated to find the exact stock certificates that are registered in that client’s name and send those certificates back to the issuing company. The company would then change the name on the certificates to those of the new owners. All the while, the price of that security could be moving against the seller. By having the securities held in street name, the brokerage firm retains the “holder of record” status but simply removes the seller as the beneficial owner. This allows transactions to be done faster and at far lower cost – which can, theoretically, boost an investor’s total return.
What are the advantages to having securities held in street name?
Convenience is the biggest advantage to having securities held in street name with a brokerage firm. Having the securities already with the broker allows investors to place limit orders that direct their broker to sell the security at a specific price. It can also make it easier to establish a margin account.
Aside from making it more convenient to execute trades, having securities held in street name with a broker means that investors have peace of mind in knowing that their brokers are responsible for the physical security of their stock certificates. Plus, the broker will also have the responsibility of communicating with investors when there are developments such as tender offers or bonds being called that require the investor’s attention.
Are there disadvantages of having securities held in street name?
The largest disadvantage for an investor to not physically owning the securities they purchase is that they will frequently experience a delay in receiving dividend and/or interest payments. This is because the payment will go to the broker who will then pass them along to investors on a schedule spelled out by the broker at the time of the trade (bi-weekly, monthly, etc.). Also, any communication from the company, such as annual reports, notice of shareholder meetings, etc. will be sent through the brokerage firm first. With investor relations information being readily available by a company through its website this may not be as much of a disadvantage.
How does owning a security in street name impact the settlement date?
There is a difference between being the owner of a security and being the owner of record. Because of the T +2 Settlement Rule put in place by the Securities & Exchange Commission (SEC), there is no difference between a security that is owned in street name and one where the investor is the holder of record. From a timing perspective, once an investor purchases a stock they become its owner. However, to be considered the owner of record (i.e. entitled to dividend payments, etc.) they usually have to wait for two business days for the trade to settle.
An example of the T+2 Settlement Rule is as follows: If an investor buys a stock on a Monday morning, the trade would not settle until Wednesday (the day of the trade plus two trading days). If the stock made a gain on Tuesday, the investor can turn around and immediately sell the stock on Wednesday to collect the profit. However, they would not see that trade settle until Friday (T + 2). This means that on Thursday, although they would no longer own the stock, they would still be considered the owner of record.
For an investor who is looking to collect a dividend, they will have to pay attention to the company’s ex-dividend date to ensure that they are considered the owner of record on that date. In our example above if they wanted to collect a dividend and the company’s ex-dividend date was on the Tuesday of that week, they would have to make sure they bought the security on the Friday before so they would be considered the owner of record on the ex-dividend date.
The final word on street name
In a global investing community where thousands of trades are occurring every minute at the click of a mouse, there is little thought given to when an investor actually owns a stock. For the purpose of taking advantage of price movements in a security, an investor becomes the owner of a security the second a trade is made. However, many investors are looking to hold a security for a length of time. In this case, rather than having to find a secure place to store individual stock certificates, the vast majority of securities are held in street name by the investor’s brokerage firm.
Because they hold thousands of shares in their inventory, holding shares in street name is a convenience for both the broker and the investor. If the investor still wishes to hold individual stock certificates, they can request that from their broker (it will add both time and expense to the trade). They can alternately choose to directly register with the company. This is a “middle of the road” approach where an investor, rather than the broker will be places as the holder of record in a company’s stock ledger, but the investor will not actually own the certificates and usually will not have the option to sell a security at the specific price and time that they desire.
Having a security held in street name still exposes the investor to the T+2 Settlement Rule. This means that, although they will legally own the security at the moment of their purchase, the trade will take three days (the day of the trade plus two additional days) to officially settle. This is significant for investors looking to collect a dividend or scheduled interest payment.
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