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Paper Stock Certificates Disappearing From the Market

December 29, 2018 Comments Off on Paper Stock Certificates Disappearing From the Market

Dematerialization itself is when paper stock certificates are no longer being issued. Paper stocks were initially important was because the investor wanted to have a piece of paper in their name, not the broker’s. Today, the ability to record this information electronically and in a timely and secure manner creates efficiency and avoids the high cost to the issuing company of paper certificates.

This cost of issuing paper certificates continues to rise. To go through a broker, not only must the trading price of the stock be paid, but the broker’s commission fee and the stock issuance fee (which can go as high as $100 per certificate) are also charged. You can see how the age of computers has definitely affected how stock certificates are issued. Certificates are decreasingly beautifully printed and engraved physical documents. They are often reduced to bytes and bits.

On the other hand, the computerization of stock ownership records eliminates the necessity of physically moving the certificates around. This computerization has reduced the opportunity for fraud (nefarious individuals would gain access to no longer valid certificates and present them as proof of ownership in the issuing company). In the past, when a stock or bond certificate was redeemed, cancelled or transferred, the piece of paper itself had to go through a transfer agent where the accounting transactions were made and the certificate itself was changed to indicate the action. After that, the SEC required that the certificates themselves by retained for a minimum of six years. This process created a huge amount of paper that had to be safeguarded.

There are a few instances of canceled certificates, scheduled to be destroyed, disappearing and then reappearing in the market place, represented as current or active. The practice of using small perforations has been a contributing factor in this situation since these perforations can be mistaken for the marks made by a notary or other seal. Additionally, the records of the transactions were often stored with the certificates themselves. In the case of theft, not only were the certificates taken, but the records which could have utilized to determine the status of the certificates, were also gone. When these cancelled certificates come into the marketplace, there is substantial opportunity for fraud.

What about collectors and their certificates? First of all, of this means that as time goes on, fewer certificates will not be coming into the marketplace because fewer are being issued and the remaining ones will be destroyed once they are no longer valid.

Secondly, the decreasing supply of new certificates for collecting will mean one of two things: either fewer people will collect them because they don’t run across them as often, or, their rarity will increase their desirability as collectibles. Fortunately for those who love collecting antique stock certificates, the latter seems to be the case so far.

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