Legal Definitions - bearer security

A bearer security is a financial instrument, such as a bond or note, where ownership is determined solely by physical possession of the document. Unlike registered securities, which record the owner's name in a registry, a bearer security does not identify a specific owner. Whoever physically holds the security is presumed to be its legal owner and is entitled to receive any payments (like interest) or the principal amount when it matures. Transferring ownership is as simple as handing the physical document to another person. Due to the risks of loss, theft, and their potential use in illicit financial activities, bearer securities are now very rare in most developed financial markets.

• Example 1: Corporate Bearer Bonds

  In the mid-20th century, a large manufacturing company might have issued physical bond certificates to raise capital for a new factory. These certificates were often marked "Payable to Bearer." If an investor purchased one of these bonds, they would simply hold the physical certificate. When it was time to collect interest payments or the principal amount at maturity, the person who presented the physical bond certificate to the company would receive the payment, regardless of who originally purchased it or whose name might have been written on a sales receipt.

  This illustrates a bearer security because ownership and the right to payment were entirely tied to the physical possession of the bond certificate. There was no official record of who bought it or who currently owned it; the company's obligation was to "the bearer" – whoever physically held the document.

• Example 2: Historical Government War Bonds

  During wartime in the early 20th century, some governments issued "war bonds" to fund their efforts. Many of these were bearer bonds. A citizen might purchase a bond certificate, and that physical certificate would entitle the holder to a future payment from the government. If that citizen later gave the bond to their child as a gift, the child, by simply possessing the physical certificate, would become the new owner and have the right to redeem it when it matured, without any need for formal transfer paperwork or registration.

  Here, the war bond functioned as a bearer security because the government's promise to pay was made to whoever physically held the certificate, not to a specific named individual. The transfer of ownership happened by mere physical delivery, without any need for official registration or paperwork, making it highly liquid but also vulnerable to loss or theft.