What Is In Street Name?
"In Street Name" is slang for when a brokerage account holds a customer's securities and assets under the name of the brokerage firm, rather than the name of the individual who is the legal owner of a security. Although the name on a stock certificate is not that of the individual, they are still listed as the real and beneficial owner and have the rights associated with the security.
For instance, if a customer purchases 100 shares of IBM's stock from a broker at Morgan Stanley. Instead of transferring the customer's legal name to the stock certificates, these stocks will be held in "street name" with Morgan Stanley.
- A security is said to be held in "street name" when a brokerage holds it on behalf of a client.
- The name that appears on the official record of the stock or bond certificate is that of the executing broker, yet the person who paid for the securities retains all ownership rights.
- Utilizing street name greatly reduces costs and increases efficiency of recording trades, especially as trading volume has vastly increased over the past decades.
Understanding In Street Name
It is more convenient for brokers to hold securities in street name due to the complexity of tracking each stock certificate to each individual. Almost all brokers hold securities electronically, and all securities in a brokers name comprise their inventory. Any time a client needs to buy or sell stocks, the broker is readily able to allocate a portion of their inventory as required.
If brokers were to hold an inventory of paper securities, securities transactions would take more time. For example, if a client would like to sell their certificates, the broker would have to find the exact stock certificates owned by the client and send those securities back to the issuing company who would then change the names on the securities to that of the new owners.
Because thousands of securities change hands daily, the cost savings from the street name convention significantly cuts down on transaction costs. These cost savings can be a material boost to investment returns.
Although holding securities in street name is the norm, some investors still prefer physical transfer and certificates held in their name. Because it has become more expensive to transfer ownership this way, brokers will charge a higher rate or otherwise expect to be compensated for the inconvenience.
Advantages of Street Name
Imagine the amount of work that would occur if your broker held stocks in your name. Every time you needed to sell them, the broker would have to find the exact stocks you own and deliver them to the buying party. They would then have to send the shares back to the company to have the name on the certificates changed to the new owner's name.
This process would take a great deal of time and effort, not to mention the fact that you wouldn't collect payment until the purchasing party physically received the stocks. By holding the securities in street name, the broker can avoid most delays associated with the transfer of ownership and quickly execute trades at a minimal cost.
The cost savings of registering securities in street name can provide a material boost to investment returns.
If brokers were to hold the physical security certificates, there would be an increased risk of physical damage, loss, and theft. By keeping them in street name, brokerages are able to retain the securities electronically. That reduces the probability of disastrous events occurring.
This safety is also extended to payments. By holding the securities in street name, the broker is ensuring that they will be delivered promptly when a transaction occurs. This system removes any uncertainty that would exist if the customer were responsible for providing the security every time a trade took place.
Finally, almost all broker-dealers in the United States are members of the Securities Investor Protection Corporation (SIPC). According to the SEC, investors holding securities in street name are covered by up to $500,000 of SIPC insurance. However, it is essential to remember that this insurance does not protect investors from price declines.
Disadvantages of Street Name
Holding securities in street name also comes with some drawbacks. Since your name is not on the record, you will not be apprised of important details from the company. This information may include reports or any other corporate communications the company sends out. Investors must rely on a brokerage or advisor to pass on information about their holdings.
Holding a physical certificate also gives investors the power to use them as collateral for a loan or most other types of credit. Securities held in street name can typically only be used as collateral in a margin account.
While securities held in street name are safe for retail investors, direct registration may be a better choice for larger investors. Stocks held in street name may be loaned to short-sellers and resold to others. So, it is possible for more than one person to own shares held in street name. If the brokerage should fail, it may not be possible to recover 100% of all securities. Investors are protected by up to $500,000 in insurance from the SIPC, but that may not be enough for high-net-worth individuals and large organizations.