The term “securities” is used in financial lingo on a daily basis. The pundits on the financial shows are always speaking about “Securities”. Your investment advisor or 401K provider probably sends you regular information about “Your portfolio of securities” and how to optimize it.
But indeed, what exactly are “Securities”? The word actually has a fairly precise meaning. Lets take a look.
According to Investopedia, a security, in the financial sense, is an instrument that holds monetary value, representing ownership or a right to ownership in a publicly traded company or a debt to be repaid with interest. The exact value of a security can change on a daily basis according to market supply and demand.
Securities are liquid instruments, meaning they can be traded on market exchanges. A company, government or other entity issues securities in order to raise money. Investors buy securities when they are initially offered, or afterward on what is referred to as the secondary market.
Two Main Types of Securities
The two main types of securities are stocks and bonds.
A stock, also known as an equity security, is an instrument representing the ownership held by shareholders in a company, partnership or trust. There are two main types of stock: Common stock and preferred stock. Most people who own stock own common shares.
Although some stocks pay out periodic dividends, most people own stock for the potential that they will increase in value. The total return they achieve is then the capital gain they realize upon the sale of the stock plus any dividends they have received while owning it.
Bonds are debt securities, meaning that they represent money that has been borrowed and must be repaid along with interest. Bonds can vary as to the length of time the instrument is in force, known as the term. They are issued by corporations, governments and government entities.
Their price can vary as interest rates and other market factors vary. If held to maturity, the bondholder will receive the exact amount he paid for the bond, plus the periodic interest he has received during the term. Bonds can be sold before the term ends, and a capital gain or loss may be realized.
Hybrid securities are those that have characteristics of both stocks and bonds. There are several types of hybrid securities, including convertible bonds, convertible stocks, preference shares and equity warrants.
How are Securities Regulated?
In the United States, securities are regulated in order to maintain trading integrity and prevent abuse. The principal regulator is the US Securities and Exchange Commission (SEC). Within the brokerage industry itself, Self Regulatory Organizations (SRO’s) provide additional oversight and regulation as well.
Most other countries have some form of government regulation on securities issues by their corporations, but in many cases, the rules governing them are less strict than in the US.