What is 'Cage'

"Cage" is a slang term used to describe the department of a brokerage firm that receives and distributes physical securities. To ensure that security ownership standards are maintained, brokerages keep cages within their offices to ensure that physical issues are secured. Stock and bond certificates are viewed as a stored value of money; if certificates are stolen or lost, individuals can stand to gain from the sale or redemption of these certificates.

BREAKING DOWN 'Cage'

Investors owning stocks typically do not hold physical stock certificates. Most stocks are held in the street name of the broker rather than each individual investor. When an investor purchases stocks, they remain registered in the issuer's books as belonging to the brokerage firm. The brokerage firm's records list the investor as the actual owner. The stock is held in book-entry form, or electronic record.

History of Stock Certificates

The financial industry has been reducing the number of physical certificates for many decades. Before technology, Wall Street utilized messengers for transporting physical stock certificates to and from the Financial District in Manhattan. By the late 1960s, the high volume of stock certificates and paperwork overwhelmed brokerage firms' cages. Trades were not completed in a timely manner, forcing many firms to close. During the Paperwork Crisis, as the event was called, thieves stole over $400 million in securities from 1969 to 1970. The losses encouraged the industry to utilize technology-driven solutions such as street-name registration for safer, easier trading.

Advantages of Street Name Registration

By keeping track of stock ownership electronically rather than through physical stock certificates, stock shares trade faster. Investors retain all rights and benefits as shareholders without the burden of keeping a physical stock certificate safe from loss or theft.

Replacing a lost certificate requires buying an indemnity bond protecting the stock's issuer and transfer agent from claims related to the original lost certificate. The bonds cost 2 to 3% of the lost stock's value. That amount can be thousands of dollars or more, depending on the stock's trading price and the number of shares the investor owns. Losing the stock certificate during a volatile time in the market means risking the stock price rising or dropping significantly.

Registering stock certificates in street name is helpful when brokerage firms close. When a firm faces liquidation, regulators ensure customers' securities transfer to another firm. Because all documentation is in one centralized account, having securities in street name eases the process.

When investors hold their stock in street name, they may use it as collateral when borrowing in a margin account. The process is inexpensive and convenient and does not require a credit check or specific repayment agreement.

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