Where are your stocks stored?

When buying stocks, you don’t get them in your mail or delivered by DHL. Stocks are stored in multiple ways which are required by law. This process consists of multiple parts and insitutions:

So basically your stocks will always remain virtually stored in the companies register and at your brokerage. They are heavily regulated by law to ensure everything goes smoothly and by the books. Although SRO’s can create their own rules, they can still be regulated by governments if needed. Do note that the above can be different depending on the country you live in.

7.1 What will happen when you own stocks from a company that goes bankrupt?

There are two ways of bankruptcy:

When a company is facing a chapter 11 bankruptcy, that means the company is almost liquidated. It’s not 100% bankrupt yet. It will ask the court to protect them from the creditors. The company must provide a detailed plan to the court how the company is trying to save their business. For example, by cutting costs, laying off employees and making detailed debt payment agreements, restructuring etc.

When facing a chapter 7 bankruptcy, that means the company stops to exist. All assets will be sold and the money will be divided between all creditors. The shares will be worthless and exchanges will delist the company. As a common stock owner you are entitled to money but as you learned before, common stockholders are the last on the list. The chances to get (a part of) your money back are practically zero. 

7.2 What if the brokerage goes bankrupt?

The SEC has a Customer Protection Rule (CPR). The CPR requires brokers to segregate client assets from their own assets. Basically brokers can’t touch your assets. If they do, they are committing fraud. The Net Capital Rule (NCR) states that the broker must have a minimum amount in liquid assets. FINRA (financial industry regulatory authority) monitors these companies on a regular basis for the above and other policies. And last but not least the Securities Investor Protection Corp (SIPC) insures the investments and handles the liquidation of the broker. The SIPC will protect up to $500.000 in securities and from that amount, $250.000 can be in cash. 

So you are pretty well protected from losses in case a brokerage goes bankrupt. Be very aware that not all brokers are regulated. And regulation is also based on the country you live in. Picking the right broker is crucial for your investing journey. You’ll learn more about picking the right broker in another chapter.

If you are wondering if you can sell or buy stocks directly from your neighbour, the answer is yes. You can buy stocks without using an exchange or broker. But this is a tedious and costly process and requires you to legally transfer the stocks. Because this is not common practise I'll not discuss this in this guide.

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