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What Is in Street Name?
A security is held in “street name” when a brokerage holds it on behalf of a client. The name that appears on the stock or bond certificate is that of the broker, but the person who paid for the securities retains ownership rights.
Having securities held in street name makes stock trading more convenient for ordinary investors and ensures that bookkeeping and other accounting tasks are carried out according to regulations.
Key Takeaways
- A security is held in “street name” when a brokerage holds it on behalf of a client.
- The name that appears on the stock or bond certificate is that of the broker, but the person who paid for the securities retains ownership rights.
- Having securities held electronically in street name facilitates speedy trading and reduces trading costs.
- Securities held in street name are covered by up to $500,000 in SIPC insurance at almost all U.S. broker-dealers.
- While securities held in street name are safe for retail investors, direct registration may be a better choice for larger investors.
How Street Name Works
When you buy or sell securities with a broker, your own name is rarely on the actual stock or bond certificate. Instead, it is held on your behalf in street name.
For instance, if an investor purchases 100 shares of General Motors (GM) stock via their brokerage, Morgan Stanley (MS), the firm will hold those shares for you in street name.
The investor still owns the shares when they are held in street name. As part of the process, Morgan Stanley will assign all ownership rights to the investor by registering the client as the beneficial owner. The broker will also send updates on how the investment is performing every month or quarter.
Registering shares in street name is not compulsory. An investor could request to register the GM shares in their own name. However, holding paper certificates is generally not advisable. It does not change the beneficial owner’s rights and makes trades more complicated and expensive. Brokerages will charge additional fees for the associated costs and inconvenience.
When held in street name, a brokerage may not even buy the shares that a customer purchases from the market, but instead allocates them to the investor from its preexisting inventory to make the trade quick and straightforward.
Advantages of Street Name
Convenience
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.
Safety
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 can also coms 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.