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Dirty stocks are any type of stock issues that are not considered to have a good delivery. When a stock is identified as being dirty, the transaction comes to a halt while the status of the stock is evaluated. Any problems that are found to exist must be resolved before the dirty stock is awarded the status of good delivery. It is only after any outstanding problems are corrected that the transaction may resume and be completed.
The status of dirty stock comes about due to some irregularity in the supporting documents that confirm the veracity of the stock. Before the ownership of the shares of stock may be transferred from in incumbent owner to the new owner, it is necessary to make sure that all endorsements and any other legal documentation is in order. Checking the status of these types of documents is standard process in any stock transaction.
When it is discovered that something is amiss with either the transfer documents or the endorsements, the progress of the transaction ceases. At this juncture, the stock is identified as dirty and the process of obtaining the documents or endorsements required begins. Once all the documentation is corrected, amended, or added, the status of the transaction comes under review. If the results of the review indicate that there are no remaining problems with the stock, the status of dirty stock is changed to a status of good delivery and the transaction moves on to completion.
The concept of dirty stock is a means of making sure that stock transactions are conducted in a uniform manner and that the opportunity for illegal or unethical sales to occur is minimized. Because good delivery status requires that all documentation and endorsements be verified and found to be in order, it is extremely difficult today to pass along stocks with questionable pedigrees. As a result of this dirty stock procedure, buyers are somewhat protected from losing a great deal of money due to the purchase of shares of stock.
Often, the incidence of dirty stock has nothing to do with an overt attempt to defraud anyone. It is much more likely that the simple omission of some supporting documents or possibly an incorrect wording or piece of information has found its way into the documentation. These types of issues can normally be resolved in very little time, making it possible for dirty stock to gain a rating as a good delivery and allow the transaction to proceed.