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What Is a Stock Certificate and Why Do I Need One?

19th Aug 2020

Are you unsure of what a stock certificate is? Do you think you might need one?

Well, in any case, you're in the right place at the right time. A stock certificate, in premise, is a document proving ownership of stock in a company. But that's not all.

In this article, we will cover in-depth what it is, why it matters, and how it is issued.

So keep reading to learn more.

What Is A Stock Certificate?

As mentioned earlier, a stock certificate is a document of ownership that proves you have stock in a company. However, nowadays, ownership of stock can be proven without a physical certificate.

Nonetheless, if an investor prefers certificates, he is able to request the brokerage house to issue the certificate, or simply contact the company issuing the stocks.

As you well know, when you buy a stock, it literally means you are buying partial ownership in the company stake. The total number of stocks that you possess will determine the ownership in percentage. Companies that have not been incorporated cannot issue public stock.

If and when a company chooses to go public, it will be moving toward incorporation, at the time of which the stock will be offered to the general public.

A certificate should contain, and usually does:

  1. The name of the corporation and date of incorporation
  2. Name of the investor
  3. The issuing date for the stocks
  4. How many shares are owned by the investor

As you can see, even though the document is simple in terms of documentation. The little information that it has is credibly important.

To Prove Ownership

In order to prove the legitimacy of a certificate, it often has a:

  1. A signature of official
  2. A seal of authenticity
  3. A registered certificate number

Even though some investors prefer the physical certificate, as mentioned, it is no longer necessary to prove ownership. Investors that buy/sell shares often will not request certificates because waiting for the issuance of the document can lengthen the transaction process.

Companies are no longer required to automatically issue such documents, but they are legally required to do so upon request. While they are mostly symbolic, there is still value in them for investors that want physical proof of stock ownership.

However, if the owner does not have any other verifiable information upon ownership, and if the stock is lost, ownership is lost as well. At that point, the document can be transferred, it can be void, etc. However, a replacement can be requested through a menial process.

This process involves getting a lost stock certificate surety bond, which helps protect the lost certificate from transference, void, and much more. But it also serves a leeway into receiving a replacement, albeit at the cost of lost time, which can have a finite impact on the value of the stock in the first place.

How Are Stock Certificates Issued?

Only incorporated entities, such as S corporations and C corporations are capable of issuing stock. Other business parties have other methods for ownership documentation.

For instance, only a private company can ask for a physical stock certificate. All public issued stock is recorded in a database, which is maintained by the exchange that was selling the stock.

Because an issued stock certificate is used to prove ownership of the stake in the corporation, there are various certificates available. Membership certificates prove ownership in a limited liability company. Partnership certificates prove ownership in limited partnerships or limited liability partnerships.

Investors should be careful when transporting or using the certificate as losing it will make it difficult to get a replacement.

Before Issuance

Before a stock certificate is issued to investors, a corporation must review the number of corporate shares that have the authorization to issue. In order to discover this information, they would review Articles of Incorporation or speak with the Secretary of State where the business was incorporated.

In general, a corporation should not issue more than half of the authorized shares. This is done so that new investors can join the company in the future without authorization for issuance of additional stock.

After this, the corporation must calculate each of the investor ownership percentages. For instance, if an investor has 10% stock in the company and there are 50 shares left to issue, this would present the shareholder with a certificate showing that they own five shares in the company.

Each stock certificate issued should consist of the name of the shareholders, the number of shares owned, and the certificate number. This is important in case the owner wants to buy or sell shares. If an investor buys more stock, one can issue a new certificate that represents the consequent shares, or a completely new certificate can be issued to cover the total share number.

In the Articles of Incorporation, the information should cover each and every investor/shareholder, their contact information, shares owned, and the number of stock certificates. This document should be stored in a secure location where it can be retrieved at a moment's notice. Also, stock certificates are only sent using certified mail.

Stock Certificate Assistance

Now that you know what a stock certificate is, why it's important, and how it is issued, you are well on your way to determine if you are in need of one or not.

If you find that you need to issue a stock certificate out of necessity or you would simply like to, you can look through our catalog of legal stock certificates for every type of company. get in touch with us and we will happily accommodate your needs.