Definition
Bearer Security refers to a type of financial instrument that does not require registration of ownership at issuance. Instead, ownership is determined solely by possession of the physical certificate. This means that there is no recorded owner in a ledger, and the holder of the certificate is presumed to be the owner with full rights to the instrument. Bearer securities can take forms such as bearer bonds or bearer shares.
Examples
- Bearer Bonds: A type of fixed-income security where the physical certificate is all that is required to redeem the bond. Interest payments are also collected by whoever holds the certificate.
- Bearer Shares: Equity instruments where the ownership is transferred simply by handing over the physical share certificates. These do not require any registration of the new owner’s details.
Frequently Asked Questions (FAQs)
Q: Why have bearer securities become rare? A: Bearer securities have become rare due to increased regulations aimed at preventing their misuse for illegal activities such as money laundering, tax evasion, and financing of terrorism. The anonymous nature of bearer securities makes tracking ownership difficult for regulatory authorities.
Q: When did the UK ban the issuance of new bearer shares? A: The United Kingdom made the issuance of new bearer shares illegal starting from May 2015. Existing holders were given a nine-month period to convert their bearer shares into registered shares.
Q: What are the risks associated with bearer securities? A: Key risks include loss or theft (since possession equals ownership), difficulty in tracking and recovering lost securities, and potential for misuse in illegal activities due to anonymity.
Q: How do registered shares differ from bearer shares? A: Registered shares have a recorded owner in a company’s shareholder register, reducing anonymity and increasing transparency in ownership, whereas bearer shares do not have any recorded ownership, which allows anonymous transfer.
Q: Can bearer securities still be issued in any jurisdiction? A: While many jurisdictions have severely restricted or banned the issuance of bearer securities, there are still some regions where they are allowed, albeit with stringent regulatory measures in place to combat misuse.
Related Terms
- Bearer Bond: A fixed-income security where the holder of the physical certificate is deemed the owner and entitled to the bond’s interest payments.
- Registered Shares: Shares that are issued to a specific person whose name is recorded in the company’s shareholder register.
- Certificate of Deposit (CD): A bearer instrument issued by banks that can be traded in the secondary market.
- Book-entry Security: Securities where ownership is recorded electronically rather than through physical certificates, offering increased security and efficiency.
- Money Laundering: The process of concealing the origins of illegally obtained money, often by means of transfers involving bearer securities.
Online References
Suggested Books for Further Studies
- “Bonds: The Unbeaten Path to Secure Investment Growth” by Hildy Richelson and Stan Richelson
- “Investment Valuation: Tools and Techniques for Determining the Value of Any Asset” by Aswath Damodaran
- “Foundations of Financial Markets and Institutions” by Frank J. Fabozzi
Accounting Basics: “Bearer Security” Fundamentals Quiz
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