Quite literally, the definition of a bearer instrument is that the person who physically possesses or “bears” the security is deemed the owner. They contain no ownership or registration information other than the representations of the person in physical possession of the security.
In most cases, the meaning of bearer instrument applies to fixed income securities like bonds. The term might also apply to physical stock certificates or “bearer shares.” However, most countries have completely outlawed unregistered physical securities due to fraud and money-laundering concerns.
There are two forms of securities: registered and bearer. With registered securities, the issuer keeps close tabs on a security’s owner. For fixed-income instruments, a company makes routine payments to the registered security owner. The name and address of the person holding the physical certificate are often even engraved on the face of the security.
To transfer ownership, the security’s owner signs the certificate or endorses it and hands it over to the issuer’s transfer agent. Once the transfer agent receives the endorsed certificate, they’ll cancel the seller’s shares and issue a new certificate in the new owner’s name. This gives the issuer a record of who owns the security. Using this method, companies can make interest and dividend payments to the stock and bond holders. It’s worth noting that many of these transactions can happen in mere minutes when they used to take days or even weeks.
One bearer instrument disadvantage is that the issuer of the security keeps no record of who owns the security. Because a physical certificate is the only evidence of ownership of bearer instruments, fraudulent transfers and payments can happen easily. Ownership is transferred by simply transferring the physical certificate to another person. Therefore, another disadvantage of these instruments is that if you lose your certificates or they get destroyed, there’s no way to recoup their value.
Because they are unregistered, bearer instruments have always carried the potential for fraud and abuse. Bearer instrument advantages include the ability to remain anonymous while investing large sums of capital. However, because the potential to use bearer instruments for tax evasion and money laundering was so high, bearer bonds haven’t been issued in U.S. corporate or municipal markets since 1982.
As a result, bearer instruments are becoming increasingly rare. In the U.S., the only bearer instruments available in the secondary market are instruments with long-dated maturities that were issued more than 40 years ago.
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