Computershare FAQ: Is Computershare Safe?

Computershare is one of the biggest sources of inquiries that I receive through my site’s e-mail address. There seems to be a lot of people out there who wonder what Computershare is, and whether Computershare is a safe source to purchase stocks through.

The short answer: Computershare is possibly the most legit source you can choose to purchase stock. When a company goes public through an IPO, or wants to raise capital through an additional offering, it is the issuer and must keep track of who the shareholder base is. As you can imagine, that is a complicated and ever-changing job, and something that most companies have no interest doing.

ExxonMobil wants to drill oil and transport it; it doesn’t want to spend its time engaged in the administrative hassle of keeping track of shareholders. This is where Computershare comes in. Companies like Exxon enter into a contract relationship with Computershare to keep track of shareholders on its behalf. When you buy $10,000 in XOM stock through Computershare, you are actually giving ExxonMobil a new source of funding. The share count gets diluted by 108 shares, but the company gets an additional $10,000 to put to work.

When you purchase stock through Computershare, you become the registered holder of the stock in street name, and you also the beneficial owner. When Exxon has to provide an accounting of who owns its stock, you will show up as an owner. If you own a few percentage points of the stock, when proxy season rolls around, people will receive your name on the shareholder list and suck up to you to get you to vote for their preferred board member or corporate management plan.

When you buy stock through Schwab, Etrade, Loyal3, or whatever discount broker catches your fancy, you are not entering into a transaction that involves the company. Technically, you are purchasing stock through the Depository Trust & Clearing Corporation which often goes by its alter ego Cede & Co.

What happens is that all of the brokers pay a fee to belong to DTCC, which operates at-cost to facilitate ownership positions. Every bank and brokerage is a participant. When Schwab participates, it may have 10,000,000 shares of Coca-Cola owned through the DTCC. If someone from Schwab sells 10,000 shares of KO on a given day, it will first try to pair it up with Schwab users that are buying KO. If there aren’t 10,000 shares of KO trying to be bought through Schwab, then it will electronically communicate with Morgan Stanley, Goldman Sachs, Citigroup, JPMorgan, and the like, and transfer shares through them. It is important to know that Cede & Co. owns your stock in street name, and you’re the beneficial owner. As a result, the company has no idea that you’re the beneficial owner unless you reach the 5% threshold and enter required disclosure territory as mandated by the Williams Act of 1968.

If you buy 10,000 shares of ExxonMobil through Computershare, you are the registered holder (streetholder) and the beneficial owner. You are also creating new capital that goes directly to Exxon (although some companies do opt out of this and instead have shares get purchased on the open exchanges). If you buy 10,000 shares of Exxon through Schwab, Cede & Co. is the registered street name holder and you are the beneficial owner. You are not creating new capital; you are trading existing shares.

Every year, Cede & Co. issues an omnibus bill that disavows all authority to make decisions and vests voting power via proxy towards the beneficial owners. This gives you the authority to vote your stock, even though you’re considered the beneficial owner and are not the street name holder.

This is why people often wonder about Computershare. They don’t see it get advertised anywhere, and its operations are a bit clunkier than most discount brokerage houses. Well, it doesn’t get advertised anywhere because there is no incentive to do so. Most Computershare plans are low cost, and even the ones that seem are only meant to offset the costs of administering the plan. Computershare is an outsourced capital raising mechanism for the companies you own, and gives you both streetholder and beneficial ownership of the firm. The reason why Computershare seems a bit clunkier, and moves slow, is because it actually has to make changes on the company’s books every time it handles a transaction. With a brokerage house, there is the Cede & Co. middleman acting at lightning speed to make you the beneficial owner of the stock. With Computershare, you don’t forfeit your street name/registered holder interest, and that is why it is a bit slower.