Share Certificate

What is a Share Certificate?

A share certificate (or stock certificate) is a legal document that acts as proof of corporate ownership. It includes the shareholder's name, the number of shares owned, and the kind of stock (common or preferred).

The corporation issues the certificate often maintained in the shareholders' records as proof of their investment.

The company may issue physical or electronic stock certificates; given that the investing process has shifted to digital platforms, the latter is now the preferred alternative.

Stock certificates are most commonly found in privately owned firms with a limited number of shareholders. On the other hand, publicly traded corporations often maintain track of their stockholders using computerized records.

The shares you purchase are financial assets that make you a part owner of the firm. As a result, it becomes critical to have proof of ownership.

For instance, assume you go to a laptop dealer to purchase one. You become the laptop owner once you have paid the cost price to the business.

However, a bill with information about the laptop, such as the company name, model, color, features, and the final paid amount, is required by law. Once the store sends you the bill, you may show it to the laptop business to prove your ownership.

The same is true for stock certificates. Once you have a stock certificate, you can prove that you are a part owner of the company.

History of Share Certificates

These certificates have a long history that stretches back to the early modern stock markets in the 1600s. A tangible piece of paper known as a ‘stock certificate’ represents shares in the early years of stock trading.

These certificates, which were exchanged between buyers and sellers, served as evidence of ownership in a firm.

The Dutch East India Company issued the first stock certificate in 1606. In exchange for capital, the corporation gave shares to investors, and with that capital, it financed its voyages to Asia to transact in spices and other commodities.

The earnings and financial success of the corporation defined the value of these shares, which investors could swap for one another.

The practice of granting such certificates extended to other nations and sectors during the 1700s and 1800s. For instance, enterprises in the United States began issuing certificates representing stock shares in banks, transportation firms, and other industries.

The stock certificate evolved into a representation of ownership, and a means for businesses to raise capital from various investors. 

Banks and other financial organizations started issuing certificates with more specific information, such as the firm name, the number of shares, and the date of issuance, in the late 1800s.

The introduction of electronic stock trading in the 1970s and 1980s changed how shares were traded and managed. With the rise of computer technology, it became possible to manage and track shares electronically, reducing the need for physical certificates.

In the United States, the Depository Trust & Clearing Corporation (DTCC) was established to manage the electronic transfer of securities, and many countries worldwide have since adopted similar systems.

Today, most shares are traded electronically and are no longer represented by physical certificates. The DTCC, for example, maintains records of all stock trades in the United States and handles the transfer of ownership when shares are sold.

Investors can now purchase and sell shares quickly and easily through online brokerages without seeing a physical certificate. Physical certificates are becoming less popular as more businesses register and manage share ownership using electronic systems.

Despite the rising prevalence of electronic systems, some businesses continue to print physical certificates to serve as a reminder of the investment and a physical representation of ownership.

This is because physical certificates offer a definite indication of possession that, in some cases, can be used to confirm ownership.

Additionally, several nations demand that physical certificates be kept for legal or regulatory reasons. Some nations simply lack the infrastructure for electronic stock transactions, and physical certificates may still be the most practical option.

Procedure for issuance of Share Certificates

For the issuance, much procedure is needed at first.

The following steps are commonly included in issuing stock certificates:

1. Approval by the Board of Directors

The Board of Directors must provide approval before issuing fresh certificates.

The company's Board of Directors decides the number of shares to be issued and approves the issuance. The council then determines the terms and conditions of the issue before approving the issuance of the certificates and the shares.

2. Preparation of Certificates

The company generates a certificate containing details such as the company's name, the number of shares, the par value of each share, the date the certificate was issued, and the shareholders' names. Some certificates also include unique serial numbers and intricate designs.

3. Signature of Certificates

Certificates are signed by authorized corporate representatives, such as the chairman or the firm's secretary, on the certificates. This helps to ensure the legitimacy and security of the ownership of the shares.

4. Delivering Share Certificates

The corporation sends the certificates to shareholders by mail or personal delivery. These certificates need to be maintained and taken care of by the certificate holder, as it is proof of ownership.

5. Record Keeping

The corporation must keep a record of the issuance of certificates in its books and records. Each certificate must contain information on who owns it, including the shareholder's name, the number of shares they own, and any ownership changes.

If the shareholder wants to transfer ownership of the shares, they must sign the certificate and send it to the new owner. The new owner must then deliver the certificate to the business to be reregistered in their name.

Components of Share Certificates

The following are the components typically included in a stock certificate:

1. Company name 

The name of the business that issued the certificate, or "company name," must be mentioned on the stock certificate. Some firms also display the company emblem and the name on the certificate.

2. Certificate number 

A certificate number is a special number that serves as the certificate's identity. Each certificate is assigned a unique number used to identify the certificate and the shareholder.

3. The number of shares

The certificate should have, in writing, the number of shares that the certificate claims to represent. This number determines the proportion of the company's profits and assets to which the holder is entitled.

4. Class of shares 

The category of shares that the certificate represents, such as common or preferred, needs to be mentioned on the certificate.

While common shares grant shareholders voting rights, preferred shares do not. Preferred shareholders, however, get dividend payments before regular shareholders since they have a preference over the company's income.

5. Par value

Par value refers to a corporation's charter-determined value for a single common share. The par value has little to do with the shares' actual worth and is, in fact, frequently lower. 

6. Shareholder name 

The certificate should also comprise the name of the person or entity who owns the shares represented by the certificate.

7. Date of issue 

The date of issue is the date on which the shares are issued. A stock certificate should mention this date. A physical certificate should be issued within two months from the date of allotment of shares.

8. Corporate seal 

A corporate seal is a tool used to emboss the firm's name and, often, the company registration number into papers. The organization's official seal, which acts as a mark of legitimacy, must be present on the certificate.

9. Signature of an authorized company official

The certificate is usually signed by one or more authorized officials, such as the President or Secretary, to indicate its validity.

Types of Share Certificates

Stock certificates can be broadly classified into two main categories:

1. Registered 

These are recorded in the firm's records and on a centralized database. The owner's name and the number of shares they own are recorded on the database, providing security and protection for the shareholder.

The firm must be informed to transfer ownership, and the new owner's information must be recorded on the database.

One of the main benefits of registered certificates is that the shareholder can receive dividend payments and other benefits directly from the company.

Additionally, the shareholder can vote on important company decisions, such as elections for the Board of Directors or approval of mergers and acquisitions.

2. Unregistered

Unregistered shares, also known as "bearer shares," are physical certificates representing stock ownership.

The individual physically holding the stock certificate is regarded as the stock owner and is not noted in the company's books or on a centralized database. The shareholders may benefit from anonymity because their names are not listed in any official record.

Unregistered certificates, however, are prone to be misplaced, stolen, or destroyed, which might mean the shareholder loses their investment.

Advantages of Stock Certificates

Owning a stock certificate and issuing one may seem antiquated in today's digitally-driven society. Nevertheless, some investors still like to maintain physical certificates as a representation of their ownership in a firm, despite the development of computerized trading.

Possession of stock certificates can give you plenty of advantages. Some of them are listed below:

1. Proof of ownership

Stock certificates are used to prove ownership of a specific number of stocks in a corporation. The certificate also mentions the shareholder’s name, company seal, and the par value of the shares.

2. Compliance with regulations 

Stock certificates are enforceable and legally recognized, defending both the corporation and the shareholder.

Moreover, stock certificates provide a permanent record of ownership, which can be useful for tracking the company's history and resolving disputes.

3. Valuable as a collectible

In some cases, share certificates can be valuable as collectible items and may appreciate over time.

Stock certificates from well-known companies, especially those with a long history or a significant impact on society, can be sought after by collectors.

Disadvantages of Stock Certificates

While possessing stock certificates carries many advantages, they also have limitations.

Some of them are:

1. Difficulty in the preservation

Stock certificates must be safely preserved since they are physical records. If lost, one needs to follow a tedious process to retrieve them; even for the companies, keeping a correct record of the number of shares outstanding and who owns them may be lengthy and difficult.

2. Generating and delivery costs

For businesses, printing and distributing certificates can be expensive. The physical certificates need to be printed and distributed; these costs can also be high.

Additionally, transferring ownership of a physical certificate can be time-consuming and costly.

Moreover, maintaining the records and tracking the ownership of stock certificates can be a complex and time-consuming process, which can increase the overall costs of the investment.

3. Susceptibility to fraud

Physical stock certificates are susceptible to fraud and fabrication, which can cost shareholders money.

For instance, stock certificates can raise money for a Ponzi scheme. Thus, it's crucial to investigate the issuer and confirm the validity of their offering before investing.

Also, stock certificates can sometimes be sold even when they haven't been registered with the relevant regulatory bodies.

Investors may be more vulnerable to fraud if they purchase unregistered securities since they may not be subject to the same levels of regulation and protection as registered securities.

4. Limited flexibility

Stock certificates are frequently one-time investments that are difficult to change or amend.

Share Certificate vs. Share Warrant

A share certificate and a share warrant are both financial instruments representing ownership in a company.

A share certificate is a legal document that certifies one's ownership in a corporation. The holder often has a say in corporate decisions and is a part of the company's earnings.

In contrast, a share warrant is a type of instrument that entitles the holder to acquire a specific number of shares of the underlying company at a predetermined price within a predetermined time frame, but not an obligation to do so.

Below are some key differences between the two:

Researched and authored by Shalin Mandhane | LinkedIn

Reviewed and edited by Parul Gupta | LinkedIn

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