Definition
Securities are financial instruments that represent an ownership position in a publicly-traded corporation (via stock), a creditor relationship with a governmental body or a corporation (via bonds), or rights to ownership as represented by an option. Securities may be broadly categorized into two categories:
- Equity Securities, such as stocks, which provide ownership interests.
- Debt Securities, such as bonds, which are loans to the entity that issued them and typically provide fixed income.
Detailed Description
Securities are instruments that signify the holder’s legal entitlement to a stake in various forms of financial assets or liabilities. They often serve as a means for corporations, municipalities, and governments to raise capital from public investors. Securities can be traded on secondary markets such as stock exchanges and Over-The-Counter (OTC) markets.
Equity securities provide the holder with equity ownership, potential dividends, and capital gains. Debt securities, on the other hand, represent borrowed money that must be repaid and typically come with the promise of regular interest payments.
Examples of Securities
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Stock Certificates: A document that certifies ownership of a portion of a corporation. It grants the holder rights such as voting on corporate matters and receiving dividends.
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Bonds: Long-term debt instruments issued by corporations, governments, or municipalities to raise capital. They entitle the holder to periodic interest payments and a return of principal upon maturity.
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Mutual Funds: Investment vehicles that pool funds from many investors to purchase a diversified portfolio of securities. They offer diversification and professional management.
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Derivative Contracts: Financial contracts whose value is derived from an underlying asset, index, or rate. Examples include options, futures, and swaps.
Frequently Asked Questions
What are the main types of securities?
Securities are mainly divided into two types: equity securities (e.g., stocks) and debt securities (e.g., bonds). Derivatives and hybrid securities (e.g., convertible bonds) also exist.
How do securities provide returns to investors?
Investors can earn returns through capital gains (selling securities for more than the purchase price), dividends from equity securities, and interest payments from debt securities.
Are securities regulated?
Yes, securities are heavily regulated to protect investors from fraud and ensure the orderly functioning of markets. In the U.S., the Securities and Exchange Commission (SEC) is the primary regulatory body.
What is the difference between primary and secondary markets?
The primary market is where new securities are issued and sold to investors for the first time. The secondary market is where investors buy and sell existing securities.
Can anyone invest in securities?
While most securities are accessible to the public, some are restricted to accredited investors. It’s important to understand the risks and seek financial advice if needed.
Related Terms
- Equity: Ownership interest in a corporation, typically represented by stocks.
- Debt Instrument: A tool for raising capital by borrowing, generally with defined terms for repayment and interest.
- Dividend: A portion of a company’s earnings distributed to shareholders.
- Primary Market: The marketplace for new securities.
- Secondary Market: The marketplace where existing securities are traded among investors.
- Stock Exchange: A platform where stocks and other securities are bought and sold.
- Capital Gain: Profit from the sale of an asset.
Online References
Suggested Books for Further Studies
- “The Intelligent Investor” by Benjamin Graham
- “Security Analysis” by Benjamin Graham and David Dodd
- “Principles of Corporate Finance” by Richard A. Brealey, Stewart C. Myers, and Franklin Allen
- “Investment Valuation: Tools and Techniques for Determining the Value of Any Asset” by Aswath Damodaran
Fundamentals of Securities: Finance Basics Quiz
Thank you for exploring the diverse world of securities with us. Happy investing!
