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Book entry is a system of tracking ownership of securities where no certificate is given to investors. In the case of book-entry-only (BEO) issues, while investors do not receive certificates, a custodian holds one or more global certificates. Dematerialized securities, in contrast are ones in which no certificates exist (instead, the security issuer or its agent keeps records, usually electronically, of who holds outstanding securities).
Most investors who use an online broker or even a regular full-service broker will have their shares held in book-entry form. This is generally convenient, as one does not have to preserve a physical stock certificates, and can buy/sell securities without turning certificates in or having new ones issued. Also, replacement costs for certificates are high in case one loses them, while book-entry ownership can never be lost thanks to technological backups. One possible negative is communications to beneficial owners from issuers. Since those communications are no longer direct, but must now move through a chain of one or generally two or more intermediaries, the likelihood of the communication not reaching the beneficial owner as quickly and surely increases.
August 8, 2006, the SEC approved a rule changed by NASDAQ, NYSE and AMEX requiring all listed securities (except certain debt securities) to be eligible for a direct registration system ("DRS") as of March 31, 2008. DRS is an entirely electronic book-entry style system that does not involve physical stock certificates. The rule change does not eliminate physical certificates, but requires issuers to be eligible for entirely electronic recording of securities ownership.
References
- See Black’s Law Dictionary 74(2d Pocket Ed. 2001.)
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