Introduction A security is a financial instrument that represents an ownership position in a publicly-traded a publicly-traded corporation (stock ), ), a creditor relationship with governmental body or a corporation ( bond), bond), or rights to ownership as represented by an option option.. A security is a fungible fungible,, negotiable financial instrument instrument that represents some type of financial value. Securities Securities include shares of corporate corporate stock or mutual funds, corporation or government issued bonds, stock options or other options, limited partnership units, and various other formal investment investment instruments . A security security is a tradable tradable finan financial cial asset asset.. The term commonly refers to any form of financial instrument,, but instrument but its its legal legal defi defini niti tion on vari varies es by uri urisd sdic icti tion. on. !n some some uri urisd sdic icti tions ons the term term specifically e"cludes financial instruments other instruments other than e#uities e#uities and and fi"ed income instruments. !n some urisdictions it includes some instruments that are close to e#uities and fi"ed income, e.g. e#uity warrants. warrants. !n some countries and$or languages the term %security% is commonly used in day-to-day parlance to mean any form of financial instrument, even though the underlying legal and regulatory regime may not have such a broad definition. The company or other entity issuing the security is called the issuer . A country&s regulatory structure determines what #ualifies as a security. 'or e"ample, private investment pools may have some features of securities, but they may not be registered or regulated as such if they meet various restrictions. Securities may be represented by a certificate or, more typically, %non-certificated%, that is in electronic (dematerialied (dematerialied)) or % book entry entry%% only form. ertificates may be bearer, meaning they entitle the holder to rights under the security merely by holding the security, or registered, meaning they entitle the holder to rights only if he or she appears on a security register maintained by the issuer or an intermediary. They include shares of corporate stock or or mutual funds,, bonds issued by corporations or governmental agencies, stock options or funds options or other options, limited partnership units, and various other formal investment instruments that are negotiable and fungible.
Functions of Securities *enera *enerally lly,, securi securiti ties es repres represent ent an invest investmen mentt and a means means by which which compani companies es and other other commercial enterprises can raise new capital capital.. ompanies can generate capital through investors who purchase securities upon initial issuance. +epending on an institution&s market demand or pricing structure, raising capital through securities can be a preferred alternative to financing through a bank loan. n the other hand, purchasing securities with borrowed money, an act known as buying as buying on a margin,, is a popular investment techni#ue. !n essence, a company may deliver property rights, in margin the form of cash or other securities, either at inception or in default, to pay its debt or other
obligation to another entity. These collateral collateral arrangements arrangements have seen growth especially among institutional investors.
Kinds of Securities There are many different different securities securities that you can invest invest your money in. They&re They&re usually usually divided into two categories debts and e#uities. A debt security represents security represents money that is borrowed and must be repaid, with terms that define the amount borrowed, interest rate and maturity$renewal date. +ebt securities include government and corporate bonds, certificates of deposit (+s), (+s) , preferred stock, etc. #uities represent ownership interest held by shareholders in a corporation, such as a stock. #uities nlike holders of debt securities who generally receive only interest and the repayment of the principal, holders of e#uity securities are able to profit from capita capitall gains gains.. /ere&s a #uick refresher on some of the most popular security investments. •
Debt securities
These include debentures, bonds, deposits, notes and commercial paper (in some circumstances). +ebt securities are usually fi"ed term securities redeemable at the end of the term, they may be secured or unsecured or protected by collateral. +ebt securities may offer some control to investors if the company is a start-up or an established business undergoing &restructuring&. !n these cases, if interest payments are missed, the creditors may take control of the company and li#uidate li#uidate it to recover some of their investment investment.. 0eople favor buying debt securities securities because of the usually higher rate of return than bank deposits. /owever, debt securities issued by a government (bonds) usually have a lower interest rate than securities issued by commercial companies.
Equity securities ommon stock is the most popular type of e#uity security. !nvestors are called shareholders and they own a share of the e#uity interest of capital stock of a company, trust or partnership. !t is like saying someone who invests in e#uity securities is buying a tiny part of a company (or a large part, depending on your budget1). n the plus side, investing in e#uity securities can gives a shareholder access to profits and capital gains, something debt securities will not. The holder of debt securities receives only interest and repayment of principal no matter how well the issuer performs financially. #uity investment may also offer control of the business of the issuer.
Derivative contracts A derivative is a security security with a price that is dependent upon or derived from one or more underlying assets assets.. The derivative itself is a contract between two or more parties based upon the asset or assets. !ts value is determined by fluctuations in the underlying a sset. +erivat +erivative ivess either either be traded traded overover-the-c the-counter ounter (T) or on an e"change e"change.. T T deri deriva vati tives ves consti constitut tutee the greate greaterr propor proportio tion n of deriva derivativ tives es in e"iste e"istence nce and are unregu unregulat lated, ed, wherea whereass deri deriva vati tive vess trad traded ed on e"ch e"chan ange gess are are stan standa dard rdi ied ed.. T T deri deriva vati tive vess gene genera rall lly y have have greater risk risk for for the counterparty counterparty than than do standardied derivatives. A deriva derivativ tivee is perhap perhapss obviou obviously sly,, derive derived d from from some some other other asset, asset, inde", inde", event, event, value value or condition (known as the underlying asset). 2ather than trade or e"change the underlying asset, derivative traders enter into agreements to e"change cash or assets over time based on the underly underlying ing asset. asset. A simple simple e"ample e"ample is a future futuress contrac contract3 t3 an agreem agreement ent to e"chang e"changee the underlying asset at a future date.
Stocks Stocks are the best known e#uity security. 4ou&re purchasing an ownership interest in a company when you buy stock. 4ou&re entitled to a portion of company profits and sometimes shareholder voting rights. Stock prices can fluctuate greatly. !nvestors try to buy stock when the price is low and sell it when the price is high. Stock has a higher investment risk than most other securities. There&s no guarantee that you won&t lose money. /owever, stock usually has the potential for the greatest returns. 5ost 5ost stock stock is consid considere ered d common common stock. stock. 0refer 0referred red stock stock normal normally ly offers offers divide dividends nds but not voting rights. ommon stockholders also have greater potential for higher returns.
Shares A share is an e#uity security. !ts owner owns one part of the capital of the company which has issued the shares in #uestion. The shares enable the shareholder the right to take part in the decision-making in the company. !f the latter operates with profit, the owners of shares may receive dividends. The amount of the dividend is decided upon by the shareholders at a *eneral 5eeting of the Shareholders.
Corporate Bonds A corporate bond is a debt instrument issued by a company. !t&s a loan to the company when you invest in a bond. 4ou&re 4ou&re entitled to receive interest each year on the loan until it&s paid off.
6onds are safer and more stable than stocks. 4ou&re guaranteed a steady income from bonds. /owever, bondholders aren&t entitled to dividends or voting rights. !n addition, stockholders have potential for greater returns in the long run.
Government Bonds *overnment bonds are issued by the S federal government. The most common are S Treasury bonds. They&re issued to help finance the national debt. *overnment bonds have very low investment risk. !n fact, they&re virtually risk-free since they&re guaranteed by the S government. /owever, the potential return is lower than stocks and corporate bonds.
Municipa Bonds 5unici 5unicipal pal bonds bonds are debt securi securitie tiess from from states states and local local govern governmen mentt entit entities ies.. These These local local entities include counties, cities, towns and school districts. The interest income you earn on the municipal bonds is usually e"empt from federal income ta"es. !t may also be e"empt from state and local income ta"es if you live where the bonds are issued. /owever, the interest rate is usually lower than corporate bonds.
!pen"end funds An open-end fund stands for a diversified portfolio of securities and similar investments, chosen and professionally managed by a fund management company. Since the fund does not have fi"ed capital but is rather &open ended&, it grows together with new investors oining and thus funding it. pen-end funds can invest in domestic and international securities, in either shares, bonds or other other inve invest stme ment nt vehic vehicle les. s. +epe +ependi nding ng on the the port portfo foli lio, o, the the fund fund&s &s risk risk and and retu return rnss vary vary accordingly.
Mutua Funds A mutual fund is made up of a variety of securities. !t may focus on stocks, bonds or a collection of both. 4our money is usually pooled with other investors. An investment company chooses the securities and manages the mutual fund. This diversity helps decrease investment risk.
Stock !ptions A stock option is the right to buy or sell a stock at a certain price for a period of time. A call is the right to buy the stock. A put is the right to sell the stock. Stock options can be used to help reduce your investment risk.
Futures !ptions A futures contract is an agreement to sell a specific commodity at a future date for an agreed upon price. A futures option is the right to buy or sell a futures contract at a certain price for a specific period of time. 5any investors use futures options to help reduce investment risk.
Investment certificates !nvestment certificates are debt securities issued by a bank, and are designed to offer the investor an agreed yield under pre-defined conditions stipulated in the prospectus. !ssuers are mainly large banks, and an important criterion in selecting the bank in whose investment certificates you would like to invest is its credit rating. !nvestment certificates represent an investment directly linked to an inde", share price, raw material price, e"change rate, interest, industry, and other publicly available values. The holder of an investment certificate does thereby not become an indirect owner of the assets underlying the certificate. A certificate ensures the investor a guaranteed manner of payment. !nvestment certificates are predictable and the investor can always anticipate their yield (or loss) in a specific situation, which makes them a successful investment vehicle in times of heavy market losses. There are different types of investment certificates 7 some guarantee yields no matter what the situation on the market, while others yield profit only when the prices fall, etc.
#arrants 8arrants are options issued by a oint-stock company, which give holders the right to purchase a certain #uantity of the respective company9s shares at a pre-determined price. After a certain period, the right to purchase shares terminates.
Securities Market a$ %rimary %rimary and secondary secondary market market 0ublic securities markets are either primary or secondary markets. !n the primary market, the money for the securities is received by the issuer of the securities from investors, typically in an initial public offering ( offering (!0 !0). ). The primar primary y market market is concern concerned ed with with the floata floatatio tion n of new issues of shares or bonds. The firms floating new issues to raise funds may be new companies or e"isting companies planning e"pansions. The 5erchant 6anking +ivision of a commercial bank is asked by the company to advice on the viability of floatation of an issue before an issue is actually floated in the market. !n the secondary market, the securities are simply assets held by one investor selling them to another investor, with the money going from one investor to the other. This market provides both li#uidity and marketability to such securities. !t implies that it is a market where a security can be
bought or sold at small transaction cost. Although the Secondary 5arket deals with the purchase and sale of old securities, the firms issuing new securities get themselves registered on a Stock "change by applying for listing of shares.
b$ %ubic %ubic offer offer and and private private pacemen pacementt !n the primary markets, securities may be offered to the public in a public offer . The most popular method for floating securities in the :ew !ssue 5arket is through a legal document called the ;0rospectus<. !t is an open invitation to the public to subscribe to the issue at par or at premium. Alternatively, they may be offered privately to a limited number of #ualified persons in a private a private placement.. An unlisted company which wants to raise e#uity funds but is not yet prepared to placement make an !0 may place privately its e#uity or e#uity related instruments with one or more sophisticated investors such as financial institutions, mutual funds, venture capital funds, banks etc. Sometimes a combination of the two is used. The distinction between the two is important to securities regulation and company law. law. 0rivately 0rivately placed securities securities are not publicly publicly tradable and may only be bought and sold by sophisticated #ualified investors. As a result, the secondary market is not nearly as li#uid as it is for public (registered) securities.
c$ !ver" !ver"the the"Co "Coun unter ter Markets Markets An over-the-counter (T) market allows investors investors to trade securities securities without without using using organied organied stock e"changes. The trades are made by telephone or over an electronic network. There&s no physical location. An T market is considered a dealer negotiated market. 6rokers and dealers negotiate among themselves on prices for securities. The largest electronic network for the T market is called the :ational the :ational Association Association of Securities +ealers Automated Automated =uotation System (:asda#). (:asda#).
