This section is from the book "Business Finance", by William Henry Lough. Also available from Amazon: Business Finance, A Practical Study of Financial Management in Private Business Concerns.
A certificate of stock and the stock itself are two different things. The certificate is in the nature of a receipt. It certifies that a given individual is the owner of so many shares, and usually gives a brief digest of the special conditions, or terms, if there are any, which govern these shares. The certificate may be destroyed or lost, but neither contingency would in itself affect the ownership of the shares, or even the legal evidence of ownership which consists of the company's own register of stockholders and of the amount of their holdings. The loss or destruction of a certificate could ordinarily mean, therefore, only so much inconvenience.
There are numerous technical questions with regard to the handling of stock certificates and the transfer of ownership of stock through delivery of certificates, which can only be touched upon here. In one recent case a stockholder had left his certificate, indorsed in blank, with a broker for safekeeping. The broker fraudulently sold the certificate. It was pointed out by the courts that if the purchaser actually was innocent and was acting in good faith, he had received a good title, and that the presumption would be that he relied upon the indorsement made by the owner, inasmuch as such indorsement would be prima facie evidence that the owner intended to give the broker the right to sell the stock. If the certificate had been left without being indorsed, and no power of attorney had been given the broker, so that he would have been compelled to forge the name of the owner, the purchaser would not have secured a clear title.
A question frequently raised is, what is to be done when a stock certificate is lost? The secretary or transfer agent of the corporation should be immediately notified not to transfer it on the books of the corporation. It is usually difficult to procure another certificate, because the corporation must be protected against loss by the filing of a bond, and this bond must be kept in force so long as there is a possibility that the old certificate may turn up. Every state has its own statute of limitations showing how long an obligation of this kind is to be regarded as legal and enforcible. The important point-that should be kept in mind in connection with all such matters is, that there is an increasing tendency, which nearly all decisions show, to make stock certificates strictly negotiable instruments, and as such transferable by indorsement without its being necessary to give further proof of ownership. It must be remembered that the holder of record of a lost certificate can vote and receive dividends as before. The loss of his certificate affects only his power to transfer his stock.
As has been indicated, stock certificates of the larger corporations in the United States are always "registered," that is to say, the list of stockholders of a corporation is kept in a register, and transfers from one name to another are made on presentation of the stock certificate properly indorsed. In England a comparatively small amount of stock is "inscribed." In this case the holder is given merely a stock receipt, which has no special value or importance. Whenever it is desired to transfer stock holdings the owner must appear in person, or in the person of some one legally entitled to act as his attorney, at the office of the corporation and there attest the transfer by signing his name in the transfer book. This is too cumbersome a method to be practicable except for small or close corporations.
A third form in which certificates may be issued is the "bearer" form. In the United States there are few, if any, bearer certificates of stock. In England they are used for preferred, guaranteed, and debenture stocks when the rates of dividend or interest are fixed, and when there is a definite date of redemption. Inasmuch as the ownership of bearer securities is not registered, the certificate itself is the sole evidence of ownership and must therefore be guarded with great care. Ordinarily, coupons (which are, in effect, a series of post-dated checks, one for each interest or dividend payment) are attached and must be cut off and deposited for payment at the proper time.