In almost every instance when you buy or sell securities with a broker, your name is not actually on the stock or bond certificate. The name that appears on the certificate is that of your broker or another nominee. This is referred to as being held "in street name."
Brokers commonly hold securities in street name due to the complexity of tracking each stock certificate to each individual. Almost all brokers hold securities electronically, so the broker usually doesn't hold the physical certificates at all. The securities held in a broker's name comprise their total inventory. Should a client wish to buy or sell stocks, the broker is able to allocate a portion of their existing inventory as required.
Holding individual securities in street name is done for many different reasons. While there is nothing to stop you from requesting that they be registered to you directly, it makes more sense to keep them under your brokerage's name. Here are some of the considerations of holding your securities in street name.
It is much more convenient for brokers to carry securities in their name, as they can be easily and readily transferred between parties. Imagine the amount of work that would occur if your broker held stocks in your name. Every time you needed to sell stocks, the broker would have to find the exact stocks you own and deliver them to the buying party, who would then have to send the stocks back to the company to have the name on the certificates changed to the new owners' names. This would take a great deal of time and effort, not to mention the fact that you wouldn't collect payment until the stocks were physically received by the purchasing party. By holding the securities in street name, the broker can avoid most delays associated with the transfer of ownership and quickly settle trades.
If brokers were to hold the physical security certificates, there would be an increased risk of physical damage, loss, and theft. By holding them in street name, brokerages are able to retain the securities electronically, effectively reducing the probability of anything negative occurring. This safety is also extended to the safety of payment. By holding the securities in street name, the broker is ensuring that a security will be delivered promptly when a transaction occurs. This removes any uncertainty that would exist if the customer were responsible for delivering the security every time a transaction occurred.
Along with convenience and safety, there are a few other things to consider about keeping your securities in street name. According to the Securities and Exchange Commission (SEC), with the securities registered in your broker's name, it's far easier to open up a margin account. You can use the certificate as collateral against the loan.
Furthermore, your broker may be able to keep you updated on certain developments regarding the company including any tender offers. You can also place limit orders, telling your broker the specific price at which to sell your security. Remember, only broker-dealers can execute a limit, market or stop order.
It also saves you time and money. If you had the certificate in your name, you would have to put it away for safekeeping — perhaps in a safe or safety deposit box. If you wanted to sell your securities, that would require you to retrieve it, sign it over to your broker who sends it over to the Depository Trust. This process can take days. If the security price drops, you could lose out by the time your certificate is ready for sale.
Finally, since you are responsible for safeguarding it, you will need to make sure nothing happens to your certificate. Consider the hassle of trying to replace a lost or damaged certificate. That takes time and it also costs money. The charges, based on how much of the security you own and how much they trade at, may put you out thousands of dollars.
Cons of Holding Securities in Street Name
While there may be a great number of advantages to holding your securities in street name, you should be aware of the disadvantages as well.
Since your name isn't on the record, you won't be apprised of important details from the company. This may include reports or any other corporate communications the company sends out. You will, therefore, be relying on your brokerage or advisor to pass on any and all of the information about your holdings to you.
Holding a physical certificate also gives you the power to use it as collateral for a loan or any other type of credit you may be seeking — anything other than a margin account, of course. If they aren't registered in your name and are registered to your broker, you won't be able to use your security as collateral as you wish.
The Bottom Line
Having securities held electronically in street name does not diminish the real and beneficial owner's rights. Rather, it facilitates speedy trading and reduces the risk of potentially negative consequences in the event that the physical certificates are lost or destroyed. Only you can decide whether you prefer holding it in your name or in street name.