Stock Power: What It Is, How It Works, and Examples
AB
Summary:
Stock power is a legal document used to transfer ownership of certain stocks to a new owner. It is required when physical possession of security certificates is chosen over holding securities with a broker. This article explains how stock power works, its requirements, and its special considerations, including its use in secured lending transactions.
What is stock power?
Stock power is a legal power of attorney form that facilitates the transfer of ownership of specific shares of stock to a new owner. It is typically used when an individual decides to take physical possession of securities certificates instead of keeping them with a broker. A stock power form contains essential information, including the previous owner’s name, a detailed description of the shares to be transferred, information about the stock certificates, and the cost basis of the shares.
How stock power works
A stock power form usually requires a signature guarantee to safeguard against fraudulent transfers. This form is sometimes referred to as a security power form. While it is primarily utilized for the transfer of physically held shares, it may also be necessary to change the account holder’s name or add a transfer-on-death beneficiary.
In secured lending transactions where securities are used as collateral for a loan, the borrower signs the stock power and provides it to the lender. However, it is typically left undated and incomplete. In this scenario, the stock power protects the lender’s interests, enabling them to foreclose on the shares if the loan is not repaid.
Special considerations
When buying or selling shares of stock, retail investors often use brokerage firms that handle all the necessary legal documentation for the transfer of ownership. Consequently, most shareholders do not take physical possession of stock certificates and are not required to complete legal paperwork when trading shares.
Today, shares are typically held electronically by the broker’s custodian, eliminating the need for physical certificates. However, before the widespread adoption of electronic records, physical stock certificates were commonplace, and stock powers were frequently used for transferring ownership.
Requirements for a stock power
Stock powers are essential for each account and each security being transferred. All owners involved in the transfer must sign the form, usually with their signatures guaranteed by a medallion signature guarantee. In some cases, if a stock power form is too old, it may be rejected.
If the owner of a stock is unable to complete a necessary stock power form, the legal representative of that individual must sign the form. This can include the Power of Attorney or custodian for someone who is incapacitated or a minor.
Frequently asked questions
What is a stock power form?
A stock power form is a legal document used to transfer ownership of specific shares of stock to a new owner, typically when physical possession of securities certificates is chosen over holding securities with a broker.
Why is a signature guarantee required for stock power forms?
A signature guarantee is required to protect against fraudulent transfers when using a stock power form for stock ownership transfer.
When is a stock power form used in secured lending transactions?
A stock power form is used in secured lending transactions when securities are utilized as collateral for a loan. It allows the lender to foreclose on the shares if the loan is not repaid.
Are there different types of stock power forms?
Yes, there can be variations in stock power forms depending on the specific requirements of the transfer. Some stock power forms are general, while others may be tailored to particular securities or accounts. It’s essential to use the appropriate form for your transaction to ensure accuracy.
What is a signature guarantee, and why is it necessary?
A signature guarantee is a certification by a financial institution that the signature on the stock power form is genuine. It is crucial to prevent fraudulent transfers. This guarantee is often required by transfer agents and financial institutions to ensure the legitimacy of the transfer.
Can I use a stock power form to gift or inherit stocks?
Yes, stock power forms can be used in gifting or inheriting stocks. When gifting, the donor signs the stock power form to transfer ownership to the recipient. In cases of inheritance, the executor or legal representative of the deceased signs the form to transfer the stocks to the beneficiary. It’s a legal and straightforward way to facilitate such transfers.
Is it possible to revoke a stock power form?
Revoking a stock power form can be challenging. Once the transfer is completed, it’s typically irreversible. However, if there’s a specific reason for revocation, consult with legal counsel to explore any potential options. Preventing a fraudulent transfer, in the first place, is the best approach.
What happens if a stock power form is rejected?
If a stock power form is rejected, it could result in delays in the transfer process. The rejection might occur due to incomplete or outdated forms. In such cases, it’s essential to review the form, ensure it’s up to date, and meets the requirements of the transfer agent or financial institution. It’s advisable to work closely with them to resolve any issues.
Key takeaways
- Stock power is a legal document for transferring stock ownership.
- It is typically required when choosing physical possession of stock certificates.
- A signature guarantee is often needed for stock power forms to prevent fraud.
- Stock powers can be used in secured lending transactions, protecting lenders.
- Most stock transactions today do not involve physical stock certificates.
- Stock powers are necessary for each account and security being transferred.
Share this post: