Stock Certificate

What is a Stock Certificate?

A stock certificate is a legal document representing ownership of a certain number of shares in a company. These documents serve as proof of equity ownership in a corporation and convey certain rights to the holder.

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Techopedia Explains

Historically, intricately designed stock certificates with border engravings or images were issued to shareholders as definitive proof of ownership. The elaborate, artistic designs made early certificates harder to be fraudulently replicated.

Today, share ownership records are predominantly maintained electronically using a centralized securities depository. Investors rarely receive a paper stock certificate anymore unless they request it.

These certificates are held securely either by the company or their designated transfer agent, while shares are traded electronically. This transition to “book-entry form” increases efficiency and reduces risks compared to issuing physical certificates.

How to Get a Stock Certificate?

While uncommon in modern-era investing, obtaining a paper stock certificate that represents your shares is still possible by one of these means:

File a Request with Your Broker

You can contact your brokerage firm as the custodian of your shares to inquire if they can issue you a certificate for the stocks currently held in your account. However, high fees ranging from $100 to $500 often apply to discourage this practice as it increases administrative costs.

Direct Registration For companies still issuing paper certificates directly to shareholders, current investors can contact the company’s designated transfer agent to switch their book-entry electronic shares to direct registration on the company’s records in order to obtain physical certificates.

This requires that the investor already owns existing shares with the company. Most companies opt to create designs from scratch by purchasing a blank stock certificate and filling it with the designs and engravings they deem fit to maintain a consistent brand identity.

Direct Stock Purchase Plans Some publicly traded companies still promote and facilitate direct stock purchases combined with the option for paper share certificate issuance to new investors. This provides a rare avenue to receive paper certificates directly from the issuing company.

Are Stock Certificates Worth Anything?

Yes, stock certificates retain legitimate financial value if they represent current legal ownership of shares in an existing publicly traded company.

In those standard cases, the market value of a share certificate is equal to the current trading price and performance of the underlying common or preferred stock it represents. The paper serves as evidence of the holder’s rights.

However, stock certificates stamped from obsolete or bankrupted companies that went out of business long ago may also still hold some value as collectible items among scripophily enthusiasts who study old financial documents and securities for historical insights or decorative appeal. Defunct certificates themselves do not convey any surviving equity ownership.

Do Stock Certificates Expire?

No, stock certificates themselves do not inherently carry an expiration date or set term of validity. Stock certificates issued long ago from companies that have survived bankruptcy, mergers, or evolution into modern conglomerates often still legally prove legitimate equity ownership today.

Of course, the originating company itself inevitably evolves over decades or centuries, as corporations are living entities. Thus, ownership percentages and valuations can significantly deviate from their initial numbers as time passes.

Therefore, stock certificates essentially retain their proof of partial ownership and rights as long as the original issuing company or its organizational descendent continues to operate.

Alternatively, certificates from dissolved, liquidated, delisted, or ancient obsolete enterprises automatically lose their financial worth when those corporations become inactive.

Brief History of Stock Certificates

Brief History of Stock Certificates
Source: OldStocks.com

The origins of stock certificates date back to the 1600s. Even though they are not common nowadays, they were the sole proof of ownership that holders who invested in publicly traded enterprises had. Here’s an overview of the history of certificates and how they have evolved through time.

Early Origins

The first distinctly recognized paper stock certificate is reportedly traced to the establishment of the Dutch East India Company in 1602. This was considered the pioneer of publicly traded globalized commerce through resource extraction and human exploitation.

This company formally issued its own paper receipts to investors as proof of capital contributions to the risky overseas imperial expeditions. They promised participation in the corporation’s future economic profits.

There remains modest contention whether slightly earlier and less formal instruments from a 15th-century German mining operation constitute the cornerstone of modern certificates.

However, the Dutch East India Company’s certificates demonstrated the unambiguous progression of modern equity-backed corporations and the use of paper-based proofs of ownership. By the 1600s, rudimentary forms of decorative borders and calligraphy also emerged and were used in the earliest specimens to deter counterfeits.

Wall Street Begins

Later emulated elsewhere, the Amsterdam Stock Exchange opened its doors in 1609 to facilitate secondary stock market transactions primarily. By 1698, the Parliament of England models their own structured East India joint stock corporation. America eventually implemented comparable share-issuing companies, including the iconic JP Morgan Chase, which was initially chartered in 1799.

As share trading was formalized through private brokerage houses and public exchanges, Wall Street in lower Manhattan earned its acclaimed title as America’s investing epicenter by the early 1800s, well before the iconic New York Stock Exchange (NYSE) construction was completed in 1903.

Share certificates from the railroad, mining, transcontinental infrastructure, telecommunications, automobile, electricity, and consumer branding companies became major additions to formal exchanges during the Industrial Revolution’s business development frenzy.

Prevalent Counterfeiting

By the mid-1800s, intricately crafted paper certificate security design features became widespread to combat rampant counterfeiting scams against burgeoning listed corporations. This sparks an artistic genre celebrating both striking aesthetics and embedded safeguards against reproduction within the paper documents themselves.

Certificate Collections Emerge

As Wall Street consolidated at the core of a rapidly maturing global capitalist system by the early 20th century, stock certificate collecting also emerged as a distinct hobby and subculture.

Scripophily, derived from Greek roots that mean “paper affection” or “certificate fondness”, becomes the categorical description for collectors who showed enthusiasm for old paper share certificates, bonds, warrants, and other similar documents. These were considered pieces of history, and even though they may not carry any financial value at the time, they were still preserved by these collectors. At this point, the practical meaning of a stock certificate changed from serving as proof of ownership to a collectible item.

The popularity of this activity spread throughout the 1920s before souring through the 1930s during the Great Depression, which erased countless struggling companies and their issued paper certificates. The Disney stock certificate later revived the frenzy among enthusiasts.

Modern Transition to Electronic Ownership

By the 1970s, the vast administrative workload and security risks that resulted from elevated stock trading volumes sparked a gradual industry transition to electronic book-entry ownership and digital transaction records. This centralized digital revolution accelerated through the 1990s and ended up becoming the standard in our days.

Meanwhile, the crypto revolution has added inspiration for a future where certificates may be stored digitally in public ledgers rather than being safeguarded by centralized entities like depositories.

5 Common Parts of a Stock Certificate

5 Common Parts of a Stock Certificate
Source: Uniquestockgift.Com

Beyond the core elements that a usual stock certificate template contains, like company name and logo, investor’s identity, number of shares, and date of issuance, these documents often include an assortment of additional features for unique identification, validation, and decoration.

Common examples include:

  1. Certificate Number: Unique serial code that facilitates tracking, often prefixed by state and year of issuance.
  2. Class of Shares: Denotes equity class such as common, preferred, or Class A/B.
  3. Par Value Per Share: An arbitrarily low benchmark price that is used primarily to fulfill legal requirements.
  4. Transfer Agent: This is the entity appointed to maintain share ownership records and process buy and sell transactions.
  5. Corporate Seal: A graphic emblem imprinted on the certificate’s paper that validates its authenticity.

Tax Implications of Owning Stock Certificates

From a taxation perspective, there are no special privileges or obligations uniquely associated with owning physical paper stock certificates compared to standard electronic book-entry shares. The same familiar asset classes and their corresponding tax principles still firmly apply:

Capital Gains Tax

For stocks held over one year, the privileged long-term capital gains tax rates apply to profits realized when share certificates are ultimately sold. However, gains on stocks held for one year or less are taxed as ordinary income at typically higher rates.

Dividend Tax

As partial owners, certificate holders must annually pay income tax rates on any dividends they receive from the business based on how many shares they own and the per-share payout approved by the Board of Directors.

Estate Tax

A major benefit of retaining paper certificates until death is the embedded estate planning device where inherited certificates are “stepped up” to full current market value as the new cost basis for heirs. Thus, heirs completely avoid income taxes on all previously accumulated latent capital gains throughout the deceased holder’s lifetime since they are absolved through this reset mechanism at inheritance.

What Happens if You Lose a Stock Certificate?

Losing a paper stock certificate or having one stolen or destroyed has become a trivial matter in the modern digital era since electronic records now define legal share ownership. However, prudent certificate holders should still take action to prevent any issues down the road.

These are some steps that investors can follow if they either lost or had their documents stolen:

  1. Promptly report any suspected theft or exploitation of a missing certificate to the company’s designated transfer agent to immediately black-list the certificate’s unique serial numbers. This prevents unauthorized transfer or fraudulent encashment since ownership and sales can be electronically tracked and frozen.
  2. If the investor wants a replacement certificate, contact the transfer agent directly to formally report it missing and request a substitution. A standard form and fee apply to reissue replacement certificates.
  3. An affidavit or indemnity bond may be required to warrant replacing lost or destroyed certificates. This legally transfers liability for potential duplication or fraud away from the issuing company.
  4. Replacement certificates hold identical significance to originals with shared equity ownership rights. Importantly, the electronic records administered by the transfer agent confer the same legal ownership rights as paper certificates did historically. Neither misplacement nor certificate replication forfeits genuinely authenticated share ownership. The electronic ledger irrefutably defines legal possession.

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Alejandro Arrieche

"Alejandro is a financial analyst, business expert, and freelance writer who's been following the markets and writing informative news content for more than seven years, covering all the latest developments and important topics in business, marketing, crypto and stocks. Other than Business2Community, Alejandro has also written for include The Modest Wallet, Buyshares, Capital.com, and LearnBonds. His daily news coverage includes technical content about economics, finance, investments, and real estate and has helped financial businesses build their digital marketing strategy. Alejandro's favourite topics are value investing and financial analysis. Alejandro graduated from Escuela Europea de Dirección y Empresa (EUDE Business School)."