Assuming that you are able to justify your investments with objective reasoning, every investor knows that there is always a degree of risk involved when investing in a company, which we refer to as the risk of personal stock holdings.
There are two types of risks related to personal stock holdings: risks regarding sudden events and risks regarding holding your stocks.
1. Sudden Events
We have all seen stock prices plummet due to information presented in a company’s press release. Although I cannot promise that this will never happen again, I can recommend a free and powerful tool that I use to monitor press releases relevant to my stock portfolio. By clicking on the link provided, you will be redirected to a page that explains exactly how you can use this tool to your advantage. Using this tool can help you react faster to sudden events, increasing the possibility of minimizing your losses.
2. Holding Your Stocks
Another type of risk related to personal stock holdings involves the risk of stock ownership itself. To demonstrate this type of risk, I have gathered some interesting articles which I recommend you to read. The first article, “Holding Your Securities“, explains the three possibilities for holding your stocks:
- Physical Certificate – The security is registered in your name on the issuer’s books, and you receive an actual, hard copy stock or bond certificate representing your ownership of the security.
- Street Name Registration – The security is registered in the name of your brokerage firm on the issuer’s books, and your brokerage firm holds the security for you in ‘book-entry’ form. Book-entry simply means that you do not receive a certificate. Instead, your broker keeps a record in its books that you own that particular security.
- Direct Registration – The security is registered in your name on the issuer’s books, and either the company or its transfer agent holds the security for you in book-entry form. The Direct Registration System (also known as DRS) allows investors to transfer securities held this way.
Depending on which method your securities are held, your risk level varies. Most investors hold their stocks in the account of their broker/dealer (street name registration). Although this is by far the easiest and most practical way to hold your stocks, you must understand that this method carries the highest level of risk, as your stock ownership can only be proven through the records of your broker. Logically, physical stock certificates are the least riskiest way to hold your securities.
If you actually have physical stock certificates in your possession, you run the risk that the certificates are lost or stolen. In the article “Lost or Stolen Stock Certificates“, you can read all about what to do in these situations.
If your stock broker goes bankrupt, you are protected by the Securities Investor Protection Corporation (SIPC). You can read all about the SIPC by clicking on the link provided. Please keep in mind that the SIPC coverage is limited to $500,000 per customer (including up to $250,000 for cash) and we must assume that the funds of the SIPC are sufficient to cover the loss of all the customers affected by the specific bankruptcy.
Read Your Rights Under SIPC Protection to inform yourself further. I also recommend you to read the following article: If a Brokerage Firm Closes its Doors.
Note: It’s my estimate, that it is highly unlikely that the funds of the SIPC are sufficient to cover the losses of all the customers affected by the bankruptcy of one or more major stock brokers.