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Book-Entry Securities

Book-Entry Securities

What Are Book-Entry Securities?

Book-entry securities are investments, for example, stocks and bonds whose ownership is recorded electronically. Book-entry securities eliminate the need to issue paper certificates of ownership. Ownership of securities is never physically transferred when they are bought or sold; accounting entries are only different in the books of the commercial financial institutions where investors maintain accounts.

Book-entry securities can likewise be alluded to as uncertificated securities or paperless securities.

How Book-Entry Securities Work

Book entry is a method of tracking ownership of securities where no physically engraved certificate is given to investors. Securities are tracked electronically, rather than in paper form, permitting investors to trade or transfer securities without introducing a paper certificate as proof of ownership. At the point when an investor purchases a security, they receive a receipt and the information is stored electronically.

Book-entry securities are settled by the Depository Trust Company (DTC), which is the Depository Trust and Clearing Corporation's (DTCC) central securities depository. An investor receives a statement giving evidence of ownership instead of a stock certificate. Dividend payments, interest payments, and cash or stock payments due to a reorganization are handled by DTC and transferred to the appropriate investment bank or broker to deposit in the account of the securities' holder. DTC sometimes may place temporary or permanent restrictions on certain transactions, like deposits or withdrawals of certificates. Such a restriction is known as a chill. For instance, DTC might impose a temporary chill that restricts the book-entry movement of securities, effectively closing the books and stabilizing existing positions until a merger or other reorganization has been completed.

Book-Entry Securities and the Government

Stock in direct investment plans, Treasury securities purchased directly from the US Department of the Treasury, and recently issued municipal bonds are held in book-entry form. In August 1986, with the introduction of a program named Treasury Direct, the Treasury started marketing all new notes and bonds just in book-entry form. The program was expanded in 1987 to incorporate T-bills. Treasury Direct makes principal, interest, and redemption payments directly into an individual investor's account at a financial institution. These payments are made electronically rather than with a money order. An investor may likewise utilize the Legacy Treasury Direct system, likewise operated by the Treasury, to buy and sell directly with the Treasury which issues an account statement to the investor as confirmation of a transaction. The government issues book-entry securities to reduce the expenses associated with paperwork. Individuals who still own old paper securities might exchange them for electronic, book-entry securities.

Book-entry securities don't move from one owner to another, instead, they are held in a central clearinghouse or by a transfer agent, as ownership changes.