Physical vs. Book Entry

Now that you understand when trades settle, let's look at how securities are actually held after settlement. There are three methods, and knowing the differences matters for the exam.

Book Entry (Street Name)

Street name is the standard method for holding securities today and the one you'll encounter most on the exam.

• Securities are held electronically in the name of the broker-dealer (or a depository like the Depository Trust & Clearing Corporation / Depository Trust Company (DTCC/DTC)) on behalf of the customer
• The beneficial owner is the customer; they receive dividends, have voting rights, and bear the economic risk
• The registered owner (also called the nominee) is the broker-dealer or depository; this is the name that appears on the issuer's books
• Virtually all securities in modern markets are held this way

Think of it this way: Your name is not on the title, but you still own the car. The dealer's name appears on the paperwork, yet all the benefits (and risks) of ownership belong to you.

Advantages of street name:

• Fastest settlement (electronic transfer between accounts)
• No risk of loss, theft, or damage (no physical certificate to protect)
• Easier transfer when selling (no need to mail or deliver a certificate)
• Enables T+1 settlement

Exam Tip: Gotchas

• "Street name" means the security is registered in the broker-dealer's name, NOT the customer's. The customer is still the beneficial owner with all economic rights. A common mix-up is confusing the registered owner (nominee) with the beneficial owner (customer).
• Street name does NOT mean the customer loses ownership rights. They keep all dividends, voting rights, and economic exposure.

Direct Registration System (DRS)

The Direct Registration System (DRS) is a middle ground between street name and physical certificates.

• Securities are registered directly in the investor's name on the issuer's books, via the transfer agent
• No physical certificate is issued; ownership is electronic but in the investor's name (not the broker-dealer's)
• The investor receives a statement of ownership instead of a certificate
• Securities can be electronically moved between DRS (at the transfer agent) and street name (at the broker-dealer) in either direction

Key distinction from street name: In DRS, the investor's name appears on the issuer's records. In street name, the broker-dealer's name appears instead.

Exam Tip: Gotchas

• DRS is electronic (no certificate) but registered in the investor's name. It is NOT the same as street name, where the broker-dealer's name appears on the issuer's books.

Physical Certificates

Physical certificates are rare in modern markets but still tested on the exam.

• Actual paper certificates representing ownership of the security
• Certificates must be in good deliverable form to be transferred:
  • Properly endorsed (signed by the registered owner)
  • Correct denomination
  • No defacing or alterations
• The transfer agent handles reregistration when physical certificates change hands
• Slowest method of settlement due to the need for physical delivery and reregistration

Exam Tip: Gotchas

• Physical certificates must be in "good deliverable form." Damaged, defaced, or unsigned certificates cannot be transferred.

Comparison of Holding Methods