Reviewing Business and Banking
Most transactions in shares and other company securities are for settlement on the appropriate account day. The great bulk of Government and other gilt edged stocks and allotments of certain issues of new shares are however for cash settlement: payment is due the day after purchase. Contract notes always show the position. Payment for sales of securities is also made on Settlement Day, always providing the seller has completed his part of the transfer arrangements. A broker is fully justified in with holding settlement until all the completed documents are in his hands. This is one very good reason why a seller should sign and return transfer and other documents without delay.
An important point to note here is that because of the minimum expenses involved in most transactions the least sum which should be put into any one security is about £100. It is of course true that any smaller sum, down to £1 or less, can be invested, but in most cases small transactions are not practicable. The best way of putting small sums into shares is through a unit trust, as we shall see in a later area.
Immediately after the end of the Account, the broker sets in motion the documentary work of transferring the shares from seller (or sellers) to buyer. The first stage is to make out a name ticket, giving (a) the full names and address of the buyer, (b) the name of the company, and (c) the class and number of shares bought. This ‘invoice’, as it may be termed, goes to the jobber who sold the shares, or through the Clearing Department of the Stock Exchange to the broker or jobber who has to deliver them. One of the major tasks of the Clearing Department is to reduce the work of unnecessary transfers in active stocks by ‘matching up ’, or eliminating complementary deals, with the result that only the ultimate sellers and buyers are brought together. Our broker may not therefore get delivery of the MJT Engineering shares direct from the jobber from whom they were bought. They may come through another jobber or broker. They may also come from more than one seller – when a fairly large number of shares is bought there may be anything up to a dozen or more sellers. The name ticket may therefore have to be ‘split’ one or more times on its journey. All that concerns the buyer is that there is efficient machinery which ensures that he will sooner or later get delivery of all the shares to which he is en¬titled.
On receiving a name ticket, the selling broker or jobber uses the information on it to make out a transfer. This gives:
1. The name of the company.
2. The number of shares or amount of stock (in figures and words) to be transferred by the document.
3. The name and address of the seller – the transferor.
4. The consideration, which is usually the price paid by the juyer, or a proportionate part if there has been a split.
5. The name and address of the buyer – the transferee.
The form is stamped, where applicable, with the Government ;transfer duty of 2 per cent. It may also be certified by the company’s registrars, or the Share and Loan Department of the Stock Exchange, to the effect that a certificate covering the appropriate number of shares has been safely lodged for transfer.
Spaces at the bottom of the form provide for the signature of the seller or sellers and buyer or buyers. All signatures have to be witnessed. Some companies, incidentally, will not accept a wife or husband as a witness. Any changes or alterations must be initialled by both seller and buyer. Transfers are key documents, and as already stated they should be completed with the minimum delay.
When, on delivery of the transfer, the buyer has completed his part of the transfer and returned it to his broker, it goes to the registration department of the company. The seller’s share certificate – if it has not already been lodged is also sent. The job of the registration department is the important one of keeping the records of shareholdings. Each investor has his own account in which are recorded purchases and sales and the balance owed. On receipt of a transfer, the account of the seller is debited with the number of shares shown as sold and a new or existing account of the buyer is credited. The old share certificate is then cancelled, and a new one is made out in the name of the buyer. If the seller has sold part only of his holding, a new certificate covering the balance is also made out in his name. The new certificates are sent to the respective brokers, or to whoever else has lodged the transfer, to be passed on to their clients. All these types of Business related facts are explained in much greater and more concise detail on courses such as the MSc Finance as well as other Banking and Business level degree courses.
The registration of transfers and preparation of share certificates takes time, the amount depending on the efficiency of the department, the volume of turnover in the particular shares, and the policy of individual companies. Until recent times it was necessary for a meeting of directors to approve and often sign certificates before their issue. Increasing numbers of companies are now taking powers to issue certificates without going through such formalities. The result is that although some companies still take several weeks or even months to complete the work, others including some very large concerns – get everything through within a few days, or as little as twenty-four or forty eight hours. The time elapsing between completion of the transfer and receipt of the share certificate may therefore be at the quickest only a week or so and at the slowest a month or two.
The share registers are the records from which are prepared dividend payments and other distributions to shareholders. When a distribution is to be made, notice is given that the registers will be closed between specified dates covering anything up to a week or more. This enables the registrar to calculate what is due to each shareholder from the balances extracted, and to prepare the necessary documents. In the case of an interim dividend and a rights offer, the cheques or other papers may be posted within a few days. But with the final dividend, or any other operation which needs the approval of shareholders, posting does not take place until after the necessary resolutions have been passed at the annual general meeting or a special meeting.
One or more of several things may thus happen between the date of buying shares and being put on the register as a shareholder, and while the seller is still registered as the owner of the shares.
Does the new shareholder suffer as a result of these unavoidable time gaps? The answer is a definite no. The Stock Exchange has machinery to deal with these situations. Before explaining them, a vital factor must be noted. When buying and selling securities it should be seen whether the price is ‘ex’ or not. Soon after a dividend is declared, the price will be quoted ‘ex dividend’, which means that although it may not be paid for some weeks, the seller – not the buyer – is entitled to the distribution ; only future dividends will belong to the buyer. Theoretically, the price is adjusted to allow for the net dividend after deduction of income tax.
Unless a price is specifically quoted ‘ex’, it can generally be taken that it is ‘ cum’ and that all subsequent declarations or rights belong to the buyer. Because of this tacit understanding, it is rare for a price to be specifically quoted ‘cum dividend’ or ‘cum’ anything else. Often these areas are chosen for the main core projects with MSc Banking and Finance degree’s or as they are also know as Masters Degree level qualifications, such courses offer the opportunity to learn much more regarding Business Law as well as Corporate level business and finance related areas. In relation to Shares, these can be easily broken down into subject areas such as:
If shares are ‘cum’ when bought, but are not registered in time for a new holder to receive any distribution direct, it is necessary to claim from the seller. This is done by the buying broker claiming from the selling broker, who in turn recovers from his client. An investor who sells shares or stock which are not ‘ex’ must therefore hand over any dividend, bonus shares, or rights to subscribe for new shares, should they go direct to him after he has sold.
Must an investor wait for the share certificate before he can sell? This is another important question. The answer again is NO. Securities, once bought, can be sold at any time, which may be a minute, a day, a week, or many years after purchase. If sold within the account, the two bargains cancel out, no share certificate is required, and the investor pays’or receives the difference in the two considerations. He is rightly credited on the sale contract with the transfer duty and company registration fee, and as previously stated he pays only one commission on the two transactions. If, however, the shares are not sold until the next or a subsequent account, all the transfer formalities must be completed, both buying and selling. The Stock Exchange has all the facilities to deal with the paper work and sort out balances between buyers, sellers, and intermediaries.