How hold stocks?

If you hold your stocks at a broker who is insured by SIPC, your account is protected for up to 500,000 dollars.

Also, after buying a stock, you can request a paper stock certificate to me mailed to your home. Then, you would hold the stock, not the broker in your name. You can then keep it in a safe place, like a metal safe at home or a safe deposit box at a bank.

Many people do this for a variety of reasons.

i

You should definitely investigate dividend reinvestment plans (DRIPs) of individual companies if you have not already done so. You are right, when banks, insurance companies, etc. are no longer certain to survive, it is reasonable to be cautious about brokerages too. I have always held ALL my individual stock stock certificates in my very own filing cabinet and was nervous about keeping them in "street name," even when people generally believed financial institutions of all types to be perfectly safe.

Have you heard of a brokerage that, when it went bankrupt, failed in its fiduciary obligations re buying, selling, and administrating dividends of a client's stock shares?

A good article on this from July 2008:

Aside: The only stupid question is an unasked one. You helped others by posting your query, too.

No, I have never heard of that. In fact, I have never even heard of brokerages failing. But, you know, until this past year I had never heard of big banks, big insurance companies, and big auto makers failing either! Since it is not a whole lot of bother keeping the stock certificates at home, I would rather be safe than sorry.

Well then you have not been paying attention. Lots of banks have failed before last year. But even in a difficult year like last year, the FDIC has managed to take orderly transition by arranging seamless transfer of bank assets. There has been not run on bank deposits. For many it is a lot of bother to keep stock certificates at home.

It is risky to assume that, because something has never happened before, it can't happen. In recent times, in financial matters, we have seen a steady stream of occurrences that previously would have seemed unlikely if not impossible. When a possible loss could seriously affect one's financial health, extra caution would seem to be in order. Call me paranoid.

Don, if you are worried about losing your stock holdings, you can always keep a certificate at home. It is only mildly cumbersome and has some important advantages, such as being a little harder for someone else to track down all your assets, especially if stocks that you own do not pay dividends.

Many brokerages, such as Ameritrade, do not really engage in other business besides handling customer accounts, and they would be unlikely to fail in a bad way. But, with modern computer threats, hackers and so on, and financial shenanigans, being concerned is the right approach.

Now, if computer records are not destroyed, realistically up to

500,000 USD is insured by SIPC, so I am personally not losing sleep over my small Ameritrade account.

Note that declines in stock prices, of course, are not covered by SIPC.

i

The SIPC insurance is reassuring to be sure, but I wonder what would happen if a large number of brokerages all shut down at the same time. I guess the same question could be asked about FDIC and banks. Strange things seem to be happening nowadays.

Another consideration: You can't set up a DRIP if your shares are in street name. At least it was that way when I set up mine.

Many brokerages will reinvest dividends at no cost and track fractional shares as well. Fidelity, for certain.

There's nothing magical at reinvesting dividends. You could just as well take dividends in cash and use it for rebalancing and further diversifying.

Frankly, many of the DRIP programs impose worse costs than doing it at a decent discount brokerage. And you end up with that many more custodians to deal with. Not much upside in my opinion.

In addition to atomatic reinvestment of dividends, it is also possible to buy more shares in the company without brokerage fees. I started with ONE SHARE of stock in each of various companies. Then I acquired the larger amounts I wanted without brokerage fees.

Then you can keep your stocks in a bank safety deposit box, no problem.

I do nt see this as a huge problem, since it has an easy solution: if you are worried about losing your stocks that you own, just request a certificate and be happy.

Is DRIP a tax nightmare? Or is it easy as far as taxes are concerned? (figuring out tax cost basis of thos efractional shares).

i

My companies do the paperwork and I just report figures included on a slip provided at tax time. I suspect there might be problems if you bought and sold shares frequently. I would say DRIPs are definitely for buy and hold investors.

It's similar to what happens to cost basis of mutual funds which reinvest dividends and capital gains.

If you buy, buy, buy, reinvest, reinvest, reinvest and then stop buying and reinvesting completely before starting to sell, sell, sell, it's easy. But you do have to keep track of every transaction. With a typical equity mutual fund, there may be one or two dividend reinvests and one or two cap-gains reinvests per year. With a typical dividend paying stock, it'd be four dividend reinvests per year. For each stock or fund you do this with, just start a spreadsheet. Or use Quicken or something similar.

It's not difficult, but it is a bit of work.

If you buy and then sell some and buy some more, the numbers get messier, particularly if you sell from more than one lot at a time (which is very likely if most of the shares were due to reinvest purchases over the years). You can also use the "average share price" method for calculating basis, but, again, it's a little messy. You really want a spreadsheet for this.

As I said, I just don't think there's much value added by doing all this. And even if you want to do dividend reinvests, it's vastly easier just to do it at a discount broker than having to deal with multiple custodians (one for each individual stock you're talking about).

This is a little misleading. According to the article I linked earlier, first a brokerage client gets back his/her share of the brokerage's assets. Then up to $500,000 is reimbursed in cash or by re- purchasing the lost shares and giving them to the client. Then typically brokers' supplemental insurance kicks in. It seems all major brokers have this supplemental insurance. "[O]nly 349 people have not received the full value of their accounts from their prorated share of the firm's assets plus SIPC coverage... most of those cases happened before 1978, when the maximum SIPC could advance was $50,000, rather than today's $500,000 limit."

Lastly, it is $500k per brokerage firm. So say use two brokerages, and a person has $1 million dollars+ of protection.

If a person cannot grasp these facts, they probably should not be buying stocks, U.S. treasuries etc. in the first place. There is a lot more risk intrinsic to simply owning securities than there is in brokerages failing, IMO.

In this scenario, why would you hold any stock? Then, it's more likely that the stock will be worth less than the paper used to print it...

HTH

Oh, it gets even better. Some companies allow DRIP participants to reinvest dividends and purchase additional shares with outside cash (as you described) at a discount.

See, e.g. the list here:

Another upside? If you're worried about the broker holding your certificates going bust, some of the DRIPs keep your shares in book entry form - so you're confident you won't loose your shares unless the company itself goes bust (in which case, does it matter?).

Mark Freeland snipped-for-privacy@nyc.rr.com

I posted here just recently that JPMorgan (formerly Bears Stearn) was dropping excess SIPC insurance.

That's a really major broker. See also on the distinction between clearing houses and introducing firms. It's the former that hold your assets. Mark Freeland snipped-for-privacy@nyc.rr.com

Right, the main worry is the COMPANY itself, not financial intermediaries. So it makes sense to carefully choose the companies in first place. That may seem risky, but I don't find it any more unnerving than trying to select a mutual fund, which is also risky. If you stick to blue chip companies that pay dividends, it may be less risky than selecting managed financial products. My strategy was to look at companies with (1) high dividends and (2) a history of gradually rising dividends over some considerabe period of time, and take it from there.