Direct Registration System (DRS) has become popular for blue-chip stocks, as many companies start to embrace the electronic book-entry system. Besides, DRS is also popular for investors who own paper stock certificates, or those participate in the dividend reinvestment program.
What is the direct registration system?
For most of the new investors, they usually invest in stocks through a brokerage account. With a brokerage account, every trade order and the purchased stocks appear in the account, the shares of stocks are registered in a street name.
To illustrate, if you own 1.000 shares of Apple through a broker, then, your stock is pooled with all of the other brokerage clients. In the books of Apple’s transfer, your stock is reported on the name of your broker.
Indeed, you are still the beneficial owner of your 1.000 shares, but your broker is the owner of the record. Then, within your broker accounting and database, it breaks down the details of which clients own which shares.
Later, the broker provides trade confirmation, brokerage statements, and tax records.
In 1996, people created Direct registration System for those who did not want their stock registered in the name of their brokerage firm.
Through the system, the investors buy and sell from the transfer agent. Or else, they can also work with their favorite stockbroker to arrange trades registered through the DRS.
What will happen if there is a shortfall?
In the case of a margin account, at least, if the brokerage firm goes down, you are left still holding the back with a general claim against the firm.
Then, what will happen to your shares that are in the street name? This has not been a problem, historically. Yet, in every few decades when there is a major blowup, investors lost a lot of money.
If there is a shortfall, don’t worry, you still can rely on securities investor protection corporation (SIPC). Up to today, it has been exceedingly rare for a brokerage customer to fail to receive his or her portfolio back, in full, in the event of a brokerage bankruptcy.
Still, if your worries stay, DRS provides a safeguard.
Writer: Lisa Ramadhani
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