Legal Definitions - dematerialized security

A dematerialized security refers to a financial asset, such as a stock, bond, or mutual fund unit, that exists purely as an electronic record rather than as a physical paper certificate. In this system, ownership is recorded and tracked digitally in a central registry or through an intermediary like a brokerage firm. This electronic format streamlines transactions, reduces the risk of loss or theft associated with paper documents, and simplifies the process of transferring ownership.

• Example 1: Purchasing Company Shares Online

  Scenario: Sarah decides to invest in a technology company by buying shares through her online brokerage account. After placing her order and the transaction is complete, she sees the shares reflected in her portfolio balance on the brokerage's website.

  Illustration: Sarah never receives a physical stock certificate in the mail. Her ownership of the company's shares is entirely a digital entry in the records of her brokerage firm and the company's transfer agent. This electronic record is the dematerialized security.

• Example 2: Investing in Government Treasury Bonds

  Scenario: A national government issues new treasury bonds to finance public projects. An institutional investor purchases a significant amount of these bonds.

  Illustration: The investor does not receive a stack of paper bond certificates. Instead, their ownership of the treasury bonds is recorded electronically in the government's central securities depository system. The interest payments and the eventual repayment of the principal are also managed digitally, confirming the bonds' status as dematerialized securities.

• Example 3: Holding Units in an Exchange-Traded Fund (ETF)

  Scenario: Mark invests in an Exchange-Traded Fund (ETF) that tracks a broad market index. He buys units of the ETF through his investment platform.

  Illustration: Mark's ownership of the ETF units is maintained solely as an electronic record by his brokerage and the fund's administrator. There are no physical certificates representing his fractional ownership of the underlying assets held by the ETF. His investment is a dematerialized security, with all transactions and ownership changes occurring digitally.