When buying or selling shares through a stockbroker on the nominee accounts are used by many investors. A nominee company will be run by a stockbroker to own shares on behalf of investors.

Legally the shares belong to the investor as it is the investor who has responsibility for the taxes to be paid on any dividends or capital gains. However, these investments can be transferred into or out of the nominee account or bought and sold by the company. The investor will still receive contract notes to confirm the actions of every trade.

Nominee accounts are used to prevent shareholders from having to deal with the paperwork and share certificates. Many stockbrokers encourage their clients to use nominee services for ease. This process was speeded up by the introduction of CDS and then given extra suupport by the arrival of T+3 settlement. T+3 means that the financial arrangements are settled three working days after the trade. Obviously, it can be very difficult (if not physically impossible) for an investor to settle paper transactions through the post in just three days.

The nominee company can collect dividends on behalf of the investor or they can be paid directly into the investor's bank account. Some stockbrokers will charge for these services.

For investors who trade actively on the Stock Exchange or are not very organised with their paperwork, the use of a nominee account will prove to be invaluable. However, the additional costs do add to the expense of a trade and so nominee accounts are of most use to larger investors.

It is probably easiest to imagine the nominee service as being similar to that offered by 'custodians' to fund management firms. It is a legal separation of assets from a stockbroker.

This is done to ensure that client assets are not at risk from the poor trading of the brokerage. Otherwise, if the brokerage was holding securities for clients and something unfortunate were to befall the company (a legal claim, bankruptcy etc), client assets could be considered to belong to the firm and be used for the wrong purposes.

Many investors actually operate a personal strategy of using both a nominee account and holding shares in the same company directly.

Why do this?

It turns out that when a brokerage nominee account holds shares, they are all essentially considered to be one holding, and the brokerage keeps the exact reecords of who owns what and how many. When it comes to annual report time and the opportunity to vots as a shareholder, the brokerage will receive just one report and one chance to vote. Therefore, many long-term owners in a company's shares will own just 1 share directly to ensure they get to see all the paperwork that the company sends out.