Understanding the stock market: Welcome to the paperless future

How to choose between holding a `beneficial interest' or holding on to share certificates

The traditional proof of share ownership is a certificate bearing the name of the shareholder and the number of shares held in the company. In an effort to streamline administration, there is a move towards "paperless dealing" with certificates being replaced by a computer record held by a nominee company.

Many private investors prefer certificates as they are the only tangible link between them and the company which they partly own. There certainly is a feeling of security to have a certificate as proof of an investment.

Inevitably, at some stage in the future, there will be an increasing pressure towards the paperless form of ownership. Just as there was an initial reaction against the abandonment of pass-books for bank savings accounts in favour of statements, investors will eventually accept the demise of certificates.

Meanwhile, shareholders have the choice between a paper proof of ownership and using a nominee to hold their shares. Although some brokers have already established a two-tier commission structure, with shareholders having certificates paying more for their deals, anyone currently wishing to remain traditional is not obliged to change.

So what is a nominee? It is a company established to hold shares and other securities on behalf of investors. Normally operated by a bank or broker, the nominee is the legal owner of the shares. However, the investors have the "beneficial interest", which means they are entitled to the dividends paid and any increase or decrease in the value of the shares.

Many stockbrokers are recommending that investors place their shares into the broker's nominee company. Although this is not a requirement, it does have certain advantages. The speed and certainty of the transfer of holdings means that the broker is able to give a more efficient service.

For example, when telephoning with a sell order, the broker has immediate access to the "shares" and, therefore, the investor will receive the proceeds of the sale five days later. However, an investor who has a share certificate will have to forward this to the broker. The proceeds will only be paid when the certificate has been received. The paperless system is certainly more convenient for an active investor.

When deciding whether to place shares in a nominee account, consideration must be given to several factors. Here are the questions you should ask the broker:

n What are the charges?

n Will you continue to get all information and other shareholder rights in those companies in which you hold shares?

For example, some companies will not grant "perks" to shareholders using a nominee, while some nominee companies charge for supplying annual reports and accounts and papers relating to annual general meetings.

n How often are dividends sent?

n If only sent at intervals, will you receive interest on the money while it is being held by the nominee?

n What is the extent of insurance which the broker carries to guard against fraud and other contingencies for his business, including assets held by the nominee company?

n What compensation arrangements are in force in the event of the service provider going bankrupt or being wound up?

Certainly, charges varies between providers. It is essential to obtain full details of these and the cost of any alternative which may be available. However, do remember, that if there is say, a pounds 20 charge for supplying a copy of the annual report, an investor can side-step the fee by asking for a copy direct from the company.

All the assets held by a nominee company should be quite clearly distinguished from the assets of the stockbroking firm. Additionally, the broker should have insurance against fraud. In the event of the firm's failure, your assets should, therefore, be quite safe.

In the event of the nominee company failing and there being insufficient assets in the nominee account, it is possible for a claim to be made from the Investors' Compensation Scheme. However, this should be viewed as a last resort back-up. Claims are limited to pounds 48,000.

Providing nothing occurs to undermine the confidence in nominees, it is a dead cert that the life of the traditional share certificate is limited. However, I for one will not abandon the paper chase until I have to, or the additional costs outweigh the feeling of well-being. Call me old fashioned, but there is comfort in having a certificate as proof of an investment.