Extensive Reading how securities are settled

Most British and Irish registered securities are settled “for the account”. A normal Account is ten working days — all deals done during the Account are put together, and everything is settled on Account Day (usually the second Monday following the end pf the Account). Because of this facility, the Jobber is given a reasonable time to match up buyers and sellers, and is greatly assisted in his task of making a free and continuous market, particularly in the less active securities.

The Account System also provides, a built-in short-term credit for investors. As a result, the practice of dealing “on margin” (common in the United States and some other countries) by which an investor pays only a part of the cost of the shares at the time of purchase, does not apply. The Broker will expect full payment to be made on the appropriate Settlement Day.

The next stage in the process is for the old certificates to be returned to the company so that new ones can be issued in the buyer's name. Today, much of the paperwork is speeded up by using a computer system, known as TALISMAN, to keep track of shares passing through the settlement process.

All shares being sold through TALISMAN are lodged temporarily with a Stock Exchange nominee company (SEPON Ltd), which then parcels out the shares to buyers as required. Finally, the company's registrar makes the necessary changes in the Register of Shareholders, and sends you your new certificate.

You should take care of this certificate. It is a legal document, and although, unlike its equivalent in pound notes, it is of no value to anyone else and can be replaced if lost or destroyed, arranging for a replacement certificate can prove costly.

If the company has announced a dividend, to which you are entitled, but which because of the delay in arranging registration has gone to the previous owner of the shares, your broker will claim it on your behalf. To avoid the need for this as far as possible, The Stock Exchange marks shares “ex-dividend” (xd), some weeks before payment is due. The share price is then adjusted to take account of the fact that one party will not be entitled to receive the forthcoming dividend by subtracting the value of the dividend. If you buy shares “ex-dividend”, you recognise the fact that your name is not going to be entered in the company register in time, and similarly the person selling “ex-dividend” is giving notice that he proposes to keep the dividend.

Even so, there will be occasions when a share sold “cum-dividend” is not registered in time. Here the TALISMAN system has simplified the problems that can arise, because it automatically claims any benefits due from the company on all the shares passing through the Market at the time, and then allocates them to the appropriate buyers.

Gilts are settled “for cash” and registered at the Bank of England; the TALISMAN system is not involved in Gilt settlement.

Special rules also apply to some other securities, particularly those issued by overseas companies, and newly-issued shares on “Renounceable Documents” which are temporary evidence of title issued before the share register is made up.

In some countries, certificates are made out to “Bearer” and no Register is kept. This makes two important differences to what has been said above: Bearer Certificates DO have intrinsic value, and dividends are NOT received automatically from the company, but must be claimed by removing and returning “coupons” attached to the certificate.