The Demise of the Paper Stock Certificate and What it Means for Companies

Though historians debate whether stock trading began in ancient Rome or in 1602 with the Dutch East India Company, individuals have been trading stock in publicly owned corporations for a long time. It used to be that when you bought shares of stock, the company would issue you a stock certificate, also known as a share certificate. This piece of paper certified ownership of the certain number of corporate shares you owned.

For decades, investors took much pride in their paper stock certificates, often framing them or engraving them with special messages to give as gifts. Some stock certificates were almost miniature pieces of art with elaborate designs. For example, Playboy is notorious for its stock certificates in the 1970’s and 1980’s that featured a reclining image of a nude centerfold. People often passed down stock certificates from generation to generation, and they became a type of family heirloom.

Complications with paper certificates

Along with the nostalgia of stock certificates, however, came complications. First, the printing and physical trading of paper stock certificates was often backlogged due to paperwork crises. When the clerks were overloaded, sometimes the New York Stock Exchange was forced to shut down for periods of time to catch up with certificate production. Furthermore, keeping paper as proof of your share ownership was risky, as often times certificates were lost or stolen, or destroyed in fires or floods. Investors also sometimes faced authentication problems when trying to redeem their certificates. Overall, the trading and filing of paper stock certificates became a very expensive process, and the Depository Trust and Clearing Corp. estimated that the processes of issuing, recording, storing, and replacing paper certificates cost over $250 million in 2002 alone.

Transition to electronic trading

The faster speed of data-processors in the 1970’s sparked the start of electronic trading. In the 1980’s, the NYSE and many companies stopped the physical trading of paper certificates and instead held them all at a central depository and kept records of the trading. Over the past three decades, paper certificates have become the distinct exception rather than the rule. In fact, over 420 of the registered publicly traded securities will not issue paper certificates at all, including companies such as Apple, Visa, and Intel. Many companies will still issue paper certificates if specifically requested by the investor, however the process can still be costly. Brokerage firms charge $500 to process a physical paper transaction. Most investors believe the cost is not worth it.

The demise and near elimination of paper stock certificates means that companies can have a more streamlined process for their investors. No longer are companies required to offer physical stock certificates, and can instead complete all transactions electronically and instantaneously. However, some investors may still have paper certificates from the past that are still valid, so companies still need to be prepared and able to handle sales of shares involving paper certificates. Many investors hold on to their paper certificates as keepsakes or collectors’ items, however, so even that type of transaction is diminishing. If you have questions regarding any securities transactions, involving paper certificates or not, do not hesitate to call an experienced business attorney at Kalia Law, P.C.

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