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.
- You may experience delays receiving dividends, interest payments, and corporate communications when your securities are held in street name.
How Street Name Works
When you buy or sell securities with a broker, your own name is rarely on the certificate. Most of these firms hold investments on your behalf in street name, meaning they are registered in their name rather than yours.
That doesn’t mean the investor doesn’t own the securities it bought. It’s just a formality. As part of the process, the broker 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 or other securities in street name is not compulsory. An investor could request to register them 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.
Moreover, investors who don’t have margin loans can rest assured that the securities they own in street name can’t be borrowed by brokers or loaned to short sellers without their written consent. Their securities are segregated per SEC regulation (Rule 15c3-3) from such activities.
Note
When held in street name, a brokerage may not even buy the shares that a customer purchases in the market. Instead, it could allocate them to the investor from its preexisting inventory to make the trade quick and straightforward.
Advantages and Disadvantages of Street Name
Advantages
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.
Important
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). Investors holding securities in street name are covered by up to $500,000 of SIPC insurance for each separate legal account, which includes a $250,000 limit for cash held in a brokerage account. In other words, if your broker goes bankrupt while holding securities you purchased in street name, you won’t be left empty-handed.
Collateral
Securities held in street name rather than your own name can nonetheless be used as collateral for margin loans at your broker and for borrowing at banks.
Make sure your broker and the assets you hold are covered by the SIPC.
Disadvantages
The U.S. Securities and Exchange Commission (SEC) points out some drawbacks to holding securities in street name.
Payment Delays
One of them is that investors may potentially experience a delay receiving dividend or interest payments as some brokers only forward these payments on a weekly, bi-weekly, or monthly basis.
Indirect Communications
Another is that you will not be apprised of corporate communications directly from the company since your name is not on its books. You will have to rely on receiving important corporate communications from your broker.
Broker-dealers are required to keep clients up to date with the goings on of their investments. Therefore, clients may find little difference between receiving corporate communications through their broker, acting as a third party, and directly from a corporation.
Note
Street name securities can be used by investors as collateral for a loan or for most other types of credit. And broker-dealers cannot borrow or loan to short sellers the securities of clients with no margin loans without their prior consent.
What Does Held in Street Name Mean?
In street name basically means a security is registered in the name of the broker rather than the individual investor. If you were to buy a stock with a broker, the certificate would show its name rather than yours, unless you specifically request otherwise.
Should You Hold Your Stocks in a Brokerage Under the Street Name?
Holding stocks in street name usually makes sense. When shares are in your broker’s name, you can buy and sell them quicker and pay lower fees.
Can My Broker Sell My Shares Without My Permission?
Just because your shares are registered in its name doesn’t mean your broker can sell them without getting your permission. The shares are owned by you. The whole in street name thing is just a formality, really. The broker knows the securities are actually owned by you and has a record of it.
The Bottom Line
If you own stock, there’s a good chance it’s registered in your broker’s name. That doesn’t really change much. Your broker will have a record that you are the actual owner and you are free to buy and sell your investments as you please. They belong to you and there is plenty of evidence to back that up.
Securities are held in street name because it’s more beneficial for investors that way. When stocks are held on your behalf by the broker, fees are lower and orders can be executed much quicker.
It is possible to reject this arrangement. However, doing so is generally foolish as you’d lose lots of benefits while acquiring little to no extra rights.
Read the original article on Investopedia.