Understanding the Holder of Record: Rights and Responsibilities

Holder of Record is a term that defines an individual or entity that possesses the rights, benefits, and responsibilities associated with owning a financial security. While the term holder of record may be applied to ownership of any financial security – including bondsBondsBonds are fixed-income securities that are issued by corporations and governments to raise capital. The bond issuer borrows capital from the bondholder and makes fixed payments to them at a fixed (or variable) interest rate for a specified period., futures, or derivatives contracts – the term is most commonly applied in relation to ownership of stocks.

Being the holder of record of a stock confers voting rights to the stockholder. It entitles them to receive dividendsDividendA dividend is a share of profits and retained earnings that a company pays out to its shareholders. When a company generates a profit and accumulates retained earnings, those earnings can be either reinvested in the business or paid out to shareholders as a dividend. or any other compensation offered to stockholders by the company that issues the stock. Being recognized as the holder of record is particularly important in regard to receiving dividends. The holder of record date, which occurs before the actual dividend date when dividends are paid, is when a company officially records current stockholders entitled to receive the dividend payment.

Summary

• Holder of Record is a term that defines an individual or entity that possesses the rights, benefits, and responsibilities associated with owning a financial security.
• Being recognized as the holder of record is particularly important in regard to receiving stock dividends.
• You can become a holder of record through direct registration, by becoming the “beneficial owner” of stock shares, or through physical possession of shares.

Becoming the Holder of Record

There are three ways in which an individual or entity (such as a corporationCorporationA corporation is a legal entity created by individuals, stockholders, or shareholders, with the purpose of operating for profit. Corporations are allowed to enter into contracts, sue and be sued, own assets, remit federal and state taxes, and borrow money from financial institutions.) can become recognized as the holder of record of stock shares. They include:

1. Through a brokerage firm

The most common way of becoming a holder of record is by purchasing stock shares through a brokerage firm. Buyers of stock who acquire shares in this manner are referred to as the “beneficial owner” of the stock shares. Such a method of stock ownership is also referred to as being “the owner in street name.”

While the brokerage firm is still officially the holder of record of the stock, the stock buyer is recognized as the “real and beneficial owner” of the shares. It gives them the rights, benefits, and responsibilities of the holder of record.

2. Direct registration

You can also become a holder of record through what is referred to as “direct registration.” With direct registration, the stock purchaser has their name entered into the stock issuer’s registry of shares and receives a statement of ownership from the issuer. Such a manner of becoming a holder of record is most common for employees of the company issuing the stock, who receive stock shares as part of their compensation.

3. Bearer form

The least common way of becoming a holder of record is through what is known as “bearer form.” In bearer form, the individual or entity with physical possession of stock certificates is recognized as the holder of record. Ownership of the stock shares is not officially recorded anywhere.

Therefore, ownership rights apply to whoever is in physical possession of the stock shares. With the advent of electronic trading, the bearer form is becoming less and less common.

Owning a Stock vs. Being the Holder of Record

In the United States, there is what is known as the T+2 settlement rule. In effect, it means that when you purchase a stock, you do not become the holder of record until two business days later, when the trade is officially settled. You own the stock from the moment you purchase it, but recognition as the holder of record does not follow until two days later.

The T+2 settlement rule comes with several implications. For example, if you purchase a stock on Monday, the 15^th, and the issuing company’s holder of record date for receiving dividends is on Tuesday, the 16^th, then you will not be eligible to receive the next issued dividend, as you will not become the holder of record of your stock shares until the following day, Wednesday, the 17^th.

The T+2 settlement rule also means that day tradersDay TraderA day trader is an individual who opens and closes all of his or her trades before the end of the trading day; no open positions are or short-term traders are briefly recognized as holders of record at a point in time when they no longer actually own the stock. For example, assume that a day trader buys 100 shares of stock of Company X on Monday morning and then sells the shares on the open of trading on Tuesday morning.

From Monday morning when they purchase the stock until Tuesday morning when they sell it, they own the stock but have not yet been recognized as the holder of record. By virtue of their Monday purchase, the T+2 settlement rule means that they will not become the holder of record until Wednesday when their Monday trade settles.

However, on Wednesday, when they become the holder of record, they do not own the stock anymore, having sold it Tuesday morning. (They will cease to be a holder of record on the following day, Thursday, when their Tuesday sell trade is settled).

Related Readings

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• Dividend PolicyDividend PolicyA company’s dividend policy dictates the amount of dividends paid out by the company to its shareholders and the frequency with which the dividends are paid
• Futures ContractFutures ContractA futures contract is an agreement to buy or sell an underlying asset at a later date for a predetermined price. It’s also known as a derivative because future contracts derive their value from an underlying asset. Investors may purchase the right to buy or sell the underlying asset at a later date for a predetermined price.
• Settlement PeriodSettlement PeriodSettlement date is used in the securities industry to refer to the period between the transaction date when an order is executed to the settlement date.
• Stock WarrantsStock WarrantsStock warrants are options issued by a company that trade on an exchange and give investors the right (but not obligation) to purchase company stock at a specific price within a specified time period. When an investor exercises a warrant, they purchase the stock, and the proceeds are a source of capital for the company.