How to hold shares
Share ownership has developed in many ways over the past 25 years. Technological advances have made share trading faster, cheaper and simpler. There has also been a shift in the number of people owning shares and the way in which they hold them.
Paper certificates used to be sent to all shareholders and these had to be kept safe as proof of ownership. Once an investor had bought a share, his or her name would appear on the company register, which lists every shareholder in the company.
Nowadays, investors can still choose to receive paper certificates but these are increasingly regarded as cumbersome and outdated by many investors and stockbrokers. Lost certificates are expensive to replace and trading takes longer, which frequently means that investors lose out, as the price at which they thought they were selling a share may not be the price at which a trade is finally settled.
Most individual investors are encouraged therefore to open so-called nominee accounts. Nominee accounts allow investors to own shares without becoming involved in any of the associated administration or paperwork.
Stockbrokers set up nominee accounts, in which they hold shares on behalf of individual investors. Investors are still the legal owners of the shares but their names do not appear on the company’s share register.
They then receive dividend payments via their stockbroker, rather than from the company directly but they are informed of every trade undertaken on their behalf. Many brokers now provide clients with electronic access to their accounts as well so they can see how their portfolio is performing on-line.
Nominee accounts are designed to facilitate share trading. Stockbrokers conduct transactions electronically and there is no need to post documents before trades can be completed. This means that shares held in nominee accounts can be processed much more efficiently so using a nominee account reduces the cost of trading. Nominee accounts are almost always required for low-cost internet trading but brokers can easily transfer paper certificates into nominee format for investors.
Nominee accounts are ring-fenced from brokers’ other activities so they are financially secure. .
Until recently, it was difficult for investors whose shares were held in nominee accounts on company issues or receive information directly about the company. But this is changing. Some stockbrokers now offer nominee account holders the chance to receive information about companies in which they are invested and to vote electronically on company matters, ranging from the renewal of board directors’ contracts to the raising of capital in the stockmarket.
Some stockbrokers also offer investors the chance to become personal members of CREST, the electronic settlement service (see below). This allows investors to benefit from electronic shareholding while holding shares directly in their name.
A special nominee account within CREST is created and the investor can then receive information directly from the company, attend and vote at company meetings and receive shareholder perks, such as discounts on products sold by the company. Personal members of CREST tend to be fairly active investors with large numbers of shares.