Today, there are many ways to buy and sell securities. For publicly traded companies, 75% of Americans are familiar with investing apps or online accounts. For private companies, many investors in companies invest with a broker-dealer and or maintain their own investments. In the first situation, an investor deals with a broker-dealer who holds the investors’ assets in a nominee account, while the second is a direct investing method controlled entirely by the investor. Both accomplish the same goal, buying or selling securities for profit or dividends, but the effect on an investor varies.
A nominee is an account held by a broker-dealer, and securities owned by an investor are held as a means of separation between the broker’s business and the assets owned by the nominee account. This separation established a level of protection for the investor. In the event of the broker’s business failing, the securities held in the nominee account cannot be ascertained by any creditor claiming assets. The stocks will still be the asset of the investor, regardless of what happens to the broker.
The issue that comes forth in this model is that, while regulators and exchanges review these accounts periodically, they do not get checked daily, which opens the door for a bad actor to commit fraud and move the assets without permission. For example, fraud could occur if the broker-dealer ‘borrows’ a client’s assets to keep them afloat, potentially. An even more extreme example would be if a broker was to take all of the money and run, though this is less likely.
The main thing to consider is that while the investor is the beneficiary of the stock, the broker has the authority to move it and sell it on the investor’s behalf. This is why it is important to look into the investor compensation programs with a broker, and for further protection, separate your assets between multiple brokers. While this option comes with risks, the broker will ultimately handle the operations of the account. If you are working through direct investing, account operations are maintained by the investor.
With direct investments, the trade-off for increased security is that an investor is responsible for buying and selling decisions. A direct stock plan can allow you to buy or sell stock in some companies directly through them without using a broker. However, according to Inverstor.gov, “Direct stock plans usually will not allow you to buy or sell shares at a specific market price or at a specific time. Instead, the company will buy or sell shares for the plan at set times — such as daily, weekly, or monthly — and at an average market price.” Both options have merit, but the choice is between complete security at the cost of time and energy.
