In finance, the term “securities” refers to tradable financial assets that hold some type of monetary value. Securities represent ownership in a publicly-traded corporation (in the form of stocks or shares) or a creditor relationship with a governmental body or a corporation (in the form of bonds). These financial instruments are bought and sold in financial markets and play a crucial role in the functioning of the global economy. Here are the two main types of securities:
- Equity Securities (Stocks or Shares): Equity securities represent ownership in a company and give shareholders a claim on a portion of the company’s assets and earnings. Shareholders have voting rights and may receive dividends if the company distributes profits. There are different types of equity securities, including common stocks, preferred stocks, and other forms of equity interests. Common stocks are the most common type of equity security, and their value fluctuates based on supply and demand in the stock market.
- Debt Securities (Bonds): Debt securities represent a loan made by an investor to a government or corporation. When an investor buys a bond, they are essentially lending money to the issuer in exchange for periodic interest payments and the return of the bond’s face value when it matures. Bonds are typically considered lower risk than stocks, especially government bonds, as they offer more predictable returns and are often backed by the issuing entity’s assets or revenue streams.
Securities are traded on financial markets, such as stock exchanges and bond markets. The buying and selling of securities enable companies and governments to raise capital for various purposes, such as funding expansion projects, research and development, or public infrastructure. Investors buy securities as a means of investment, hoping that the value of the securities will increase over time, allowing them to sell the securities for a profit.
Additionally, there are various other types of securities and financial instruments, including:
- Derivatives: These are financial contracts whose value is derived from the performance of an underlying asset, index, or rate. Common derivatives include options and futures contracts.
- Mutual Funds and Exchange-Traded Funds (ETFs): These are investment funds that pool money from multiple investors to buy a diversified portfolio of stocks, bonds, or other securities.
- Certificates of Deposit (CDs) and Treasury Bills: These are short-term debt securities issued by banks and governments, respectively. Investors receive fixed interest payments and the return of their principal at maturity.
- Real Estate Investment Trusts (REITs): These are companies that own, operate, or finance income-producing real estate across various sectors, such as residential, commercial, or industrial properties. REITs allow investors to invest in real estate without having to buy and manage properties themselves.
Securities markets are regulated to ensure transparency, fairness, and investor protection. Investors often work with brokers and financial advisors to buy and sell securities in accordance with their financial goals and risk tolerance.