Book-Entry Securities

Book-entry securities are investments such as 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 merely changed in the books of the commercial financial institutions where investors maintain accounts.

Book-entry securities can also be referred to as uncertificated securities or paperless securities.

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, allowing investors to trade or transfer securities without having to present a paper certificate as proof of ownership. When an investor purchases a security, s/he receives a receipt and the information is stored electronically.

Book-entry securities are settled by the Depository Trust Company (DTC), which is the Depository Trust & Clearing Corporation’s (DTCC) central securities depository. An investor receives a statement providing evidence of ownership instead of a stock certificate. Dividend payments, interest payments, and cash or stock payments due to a reorganization are processed 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, such as deposits or withdrawals of certificates. Such a restriction is known as a chill. For example, DTC may impose a temporary chill that restricts book-entry movement of securities, effectively closing the books and stabilizing existing positions until a merger or other reorganization has been completed.

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 began marketing all new notes and bonds only in book-entry form. The program was expanded in 1987 to include 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 by check. An investor may also use the Legacy Treasury Direct system, also operated by the Treasury, to buy and sell directly with the Treasury which issues an account statement to the investor as confirmation of transaction. The government issues book-entry securities to reduce the expenses associated with paperwork. Individuals who still own old paper securities may exchange them for electronic, book-entry securities.

Book-entry securities do not move from owner to owner, instead, they are held in a central clearinghouse or by a transfer agent, as ownership changes.