Certificated securities: Overview, definition, and example
What are certificated securities?
Certificated securities are physical, paper-based certificates that represent ownership of securities, such as stocks, bonds, or other financial instruments. These certificates serve as proof of ownership and are issued by the issuing company or entity. Each certificated security typically includes details such as the security's value, the name of the holder, the issuer's name, and other relevant information. While electronic systems have largely replaced physical certificates, certificated securities are still used in certain cases where physical proof of ownership is required.
For example, a shareholder in a company may receive a stock certificate that denotes their ownership of a specific number of shares in the company.
Why are certificated securities important?
Certificated securities are important because they provide tangible evidence of ownership and rights associated with a specific security. Before the rise of electronic trading and digital securities, physical certificates were the primary means of transferring and verifying ownership. While many markets have shifted to electronic, book-entry systems, certificated securities continue to be relevant in situations where physical certificates are required for legal or regulatory purposes, or for investors who prefer holding physical proof of ownership.
In certain circumstances, such as in private transactions or with smaller firms, certificated securities are still used to represent ownership and facilitate the transfer of ownership rights.
Understanding certificated securities through an example
Let’s say an investor purchases 100 shares in a company. Instead of having the shares electronically recorded, the company issues a physical stock certificate to the investor. The certificate serves as proof of ownership, and it can be transferred to another person if the investor sells the shares. The certificate would list the investor's name, the number of shares owned, and other details relevant to the security.
In another example, a bondholder may receive a physical bond certificate representing their ownership in a government or corporate bond. The bond certificate would include the terms of the bond, such as the interest rate and maturity date, and the holder would present this certificate to receive payments or redeem the bond at maturity.
An example of a certificated securities clause
Here’s how a certificated securities clause might appear in a contract or offering document:
“The Company shall issue certificated securities in the form of stock certificates for each shareholder, which shall be delivered to the shareholder upon the purchase of shares, in accordance with the terms outlined in this Agreement.”
Conclusion
Certificated securities are physical, paper-based certificates that represent ownership of financial instruments such as stocks and bonds. While the use of certificated securities has decreased with the rise of electronic trading and digital systems, they remain important in certain contexts, particularly where physical proof of ownership is required. Certificated securities provide a tangible record of ownership, which can be transferred or used for verification purposes in transactions and legal matters.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.