Stock certificates: Overview, definition, and example
What are stock certificates?
Stock certificates are physical or electronic documents issued by a corporation to represent ownership of a specific number of shares in the company. These certificates serve as proof that the holder owns a portion of the company and are typically issued in the name of the shareholder. Although stock certificates were once common for paper-based ownership of stocks, many modern companies now issue shares electronically, eliminating the need for physical certificates.
For example, if an individual buys 100 shares of a corporation, they might receive a stock certificate representing their ownership in the company. The certificate will specify the number of shares owned, the class of stock, and the issuing company.
Why are stock certificates important?
Stock certificates are important because they serve as legal proof of ownership in a corporation. They provide shareholders with evidence of their investment and, depending on the class of stock, may come with certain rights such as voting power and dividends. Although less common today, stock certificates were historically used for record-keeping and to facilitate the transfer of ownership.
For shareholders, owning a stock certificate (or equivalent electronic record) provides security and documentation of their investment. For companies, issuing stock certificates is a way to manage shareholder ownership and maintain clear records.
Understanding stock certificates through an example
Imagine you invest in a company by purchasing 50 shares of stock. The company then issues a stock certificate to you, which includes information such as:
- The number of shares (50 in this case)
- The class of shares (e.g., common stock)
- The company’s name
- The certificate number for tracking purposes
- The shareholder’s name
This certificate serves as proof of ownership and allows you to participate in shareholder activities, such as voting in company elections or receiving dividends.
In another example, a corporation decides to go digital and no longer issues physical stock certificates. Instead, the company maintains an electronic record of share ownership. Shareholders receive updates about their shares and can transfer ownership electronically.
An example of a stock certificate clause
Here’s how a stock certificate clause might appear in a corporate charter or shareholder agreement:
“The Company shall issue certificates representing the shares of stock in the Company to each shareholder upon request. Such certificates shall be signed by the President and the Secretary of the Company and shall be registered in the name of the shareholder.”
Conclusion
Stock certificates provide evidence of ownership in a corporation and offer shareholders a documented claim on the company’s assets, voting rights, and potential dividends. While physical certificates are less common today due to the rise of electronic record-keeping, they still serve as an important historical and legal tool for confirming ownership.For investors, stock certificates provide a tangible record of their shares, while for companies, issuing stock certificates or maintaining electronic records helps manage and track ownership in a legally compliant manner.
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.