What is Certificated Stock
Certificated stock generally refers to commodity inventory that has been inspected by qualified representatives and determined to be of basis grade for use in futures market trading. Certificated stock is an important part of futures trading, as certificated stock is deemed to be acceptable for delivery and, in general, of high quality and suitable for wholesale shipment.
In some instances, certificated stock may also refer to share certificates issued by corporations for their shares. Share certificates are not commonly issued, rather share ownership is recorded via book-entry, so this term more commonly relates to commodity inventories.
- Certificated stock is commodity inventory inspected by qualified representatives and approved for futures market trading.
- Certificated stock ensures that the underlying commodity of a futures contract meets minimum specifications and is of a typically uniform nature.
- Certificated stock less frequently refers to a stock for which a stock certificate has been issued.
Understanding Certificated Stock
Certificated stock inventory is a key component of the commodity futures market. While investors can use commodity futures purely for speculative bets, a great deal of the market is based on physical delivery of the underlying product.
Many commodity producers use the futures market to sell their inventory and hedge market volatility. In the U.S., popular exchanges used by commodity producers include the CME Group's New York Mercantile Exchange, Chicago Mercantile Exchange (CME), and Chicago Board of Trade (CBOT), as well as the Minneapolis Grain Exchange (acquired in 2020 by Miami International Holdings). Commodities listed across these exchanges include corn, wheat, soybeans, oats, rice, coffee, sugar, and many more.
To participate in futures market trading, producers must maintain certain licenses and ensure that their product is in compliance with regulations. Through licensing, producers can establish relationships with local inspectors who can provide certification of commodity inventory on a scheduled basis.
Certificated stock can be used as delivery against futures contracts and is normally kept at a designated holding facility until transfer. Certificated stock ready for delivery is typically known as "stock in deliverable position" or deliverable stock. The exchange determines how commodities are shipped and the location of the warehouse, delivery, and pickup.
Futures Market Trading
Farmers, producers, and corporations use the futures market to sell their commodities at a specified price. Buyers of commodity inventory take the opposite position. They may need the commodity to run their business or may use the futures market as a hedge.
Speculators, which include individuals all the way up to large hedge funds, may be buyers or sellers of commodity futures. They don't take delivery of the underlying product, though. Rather, they close out their positions before the futures expire, taking any profits or losses on the futures contracts themselves.
Buyers and sellers of commodities on the futures market are the primary influencers of supply and demand and determine commodity prices.
While certificated stock is generally a term used for commodity inventory, in some instances it may also refer to corporate stock certificates. Companies issue shares of stock through an initial public offering (IPO). Once issued, stocks trade daily in the secondary market through various exchanges.
When a company issues shares of stock it will be accompanied by a stock certificate, also known as a share certificate. Most certificates are managed electronically. However, an investor may request a physical copy of a stock certificate for administrative purposes. Stock certificates will include the number of shares owned, the date of ownership, identification numbers, a unique corporate seal, and management signatures.
Stocks with a certificate are called certificated shares, while stocks without a certificate are called uncertificated shares or book-entry shares.
Example of Certificated Stock Using Gold Futures
For gold to be used for trading on the Chicago Mercantile Exchange (CME) it needs to meet certain standards in order to become certificated stock. If gold doesn't meet these standards, it can't be used for delivery in a futures contract.
As of 2021, the CME has the following specifications for its 100 troy ounce gold futures contract.
- The weight of the gold bar must be within 5% higher or lower than 100 troy ounces.
- The gold must be a minimum of 995 fineness.
- The gold must be a brand approved by the exchange and have one or more of the exchange's brand marks on the bar.
- Each gold bar must also have the weight (troy ounces or grams), fineness, and bar number on the bar.
Specifications also include how and where the gold can be transported, stored, and delivered.