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What is the DTC & Why Investors Should Care

May 4, 2017

 

Popular culture loves to glamorize Wall Street, and to be honest those of us on the street don't mind the attention. That being said, there's a lot more to Wall Street than what meets the eye. When Hollywood portrays Wall Street, it can be tough to tell that the fast paced trading and billion dollar deals don't happen by themselves. There are entire teams of people working tirelessly to make our financial markets run smoothly and effectively.

 

One of these wonderful organization is the Depository Trust Company. 

 

What is the Depository Trust Company?

 

You've probably never heard of the DTC, but if you've ever bought or sold stocks before you've experienced the benefit of their existence. The Depository Trust Company was established in 1973 to reduce the costs associated with clearing and settling securities. 


Before the Depository Trust Company if you traded a stock, you had to physically transfer the certificate. Now, this worked for a while but by the 1960s trading volumes got to be so high that it was no longer practical. In order to allow brokerage firms to catch up on paperwork the NYSE was forced to close on Wednesdays for a few months! 

 

The Depository Trust Company allows brokers to transfer securities from one client and one firm to another with just an accounting journal entry, a much more efficient process than sending messengers up and down Wall Street. This also paved the way for the electronic settlement processes we have today. 

 

Exactly how the DTC does this is beyond the scope of this article, but investors should know that the DTC plays an important role in insuring that your stock transactions (and those of everyone else in the market) go smoothly. 

 

Why should traders and investors care about DTC Eligibility? 


DTC eligibility makes it much easier for your broker to transfer stocks, therefore some brokers charge additional fees or restricting trading in stocks that aren't DTC eligible. These fees depend on the firm you trade through but can be up to $50, a pretty big price to pay especially if you hope to diversify your portfolio across multiple non-DTC eligible stocks. 

 

As of 2006, all listed stocks (meaning those on the NYSE and NASDAQ group of markets) are required to be DTC eligible. This is not the case for the OTC markets where the majority of marijuana stocks trade in the United States. Some stocks that trade OTC are DTC eligible, while others aren't. Companies are usually proud of their status as a DTC eligible company, so they often mention it somewhere in the investor relations section of their website (Tip: all of our marijuana stock profiles have links to the company's investor relations page). If not it's recommended that you contact the company specifically.  Although some brokers keep lists of DTC eligible stocks, these lists can be out of date, so it's always best to do your own research. 

 

Don't be too discouraged if a stock that you want to own or trade isn't DTC eligible yet, just take the additional fees into account when making your decision. If you really like the stock, don't let a lack of DTC eligibility deter you. 

 

Conclusion


We hope this article not only helps you avoid (or at least know the reason behind) some additional fees that can come from trading marijuana stocks that aren't DTC eligible and gives you an better appreciation for all that goes on "behind the scenes' when you place a trade. 


Happy Trading!

D/M/O

 

Now read a The Inner Workings of ETFs

 

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