Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Book-Entry Securities

What it is:

Book-entry securities are securities issued in electronic form rather than in paper form.

How it works (Example):

The commercial book-entry system is a system whereby the investor's ownership of the security is reflected only in the investor's account records at his or her financial institution, brokerage firm or dealer. This lets investors trade the securities without having to produce the physical securities and it allows them to use the securities as collateral for other transactions within the firm. Also, the identity of the holder appears only on the institution's records.

Investors have three book-entry options for holding savings bonds: TreasuryDirect, Legacy Treasury Direct and the commercial book-entry system (also known as the Treasury/Reserve Automated Debt Entry System, or TRADES). The first two systems are operated directly by the Treasury, and investors who use the system buy and sell directly with the Treasury. The investor receives an account statement from the Treasury, and the Treasury knows the identity of the holder of the bond.

Why it Matters:

Though many securities, particularly bonds and stocks, are still issued in paper form, the advent of book-entry securities has streamlined and reduced the cost of the process of buying and selling securities for both investors and exchanges.

However, holding securities in electronic form is sometimes unattractive to investors who want physical evidence of ownership or want to commemorate an event, such as a child's first investment or an IPO. In many cases, investors can get a paper receipt for their purchase, however -- and this is often especially valuable to those who hold securities via the commercial book-entry system -- if the broker "loses" the record of the purchase, the investor has a big headache on his hands.

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