Power of Substitution Meaning & Definition

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Definition of Power of Substitution

A power of substitution is also known as a stock or bond power. When this form is signed by the owner and attached to a security, it makes the security negotiable. The security may now be delivered by the customer’s broker dealer to the buying broker dealer to settle a trade.

Applying "Power of Substitution" to Securities Exams:

When a customer has a stock or bond certificate registered in their name, the customer must sign or endorse the certificate to make it transferable. A customer may sign the back of the stock or bond certificate much like one would sign the back of the title to a car, to sell the car to a new owner. If the customer does not wish to sign the back of the stock certificate and mail it to their broker dealer for security reasons, or if the broker dealer is holding the certificate for the customer, the customer may sign a stock or bond power and send it to the broker dealer. Most customers elect to hold their securities in “street name”, the name of the broker dealer, to make transferring (selling ) securities easier. Holding securities in street name allows the customer to avoid having to sign certificates. Make sure you are ready to pass your exam with our Greenlight money back pass guarantee.

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The Securities Institute of America, Inc.