Understanding Securities
Introduction
In the simplest of the terms, security is a financial instrument or a financial certificate that has a monetary value and can be traded. It represents ownership in a publically traded corporation as a stock. Investment securities refer to financial assets that can be traded and are held by financial services firms such as Asset Management Companies (AMCs) or by individuals such as money managers who often operate Mutual funds.
Often, Securities are used to provide liquidity and profits to these AMCs and money managers. They help banks meet their pledge requirements for government deposits or are used as collateral. Securities have different meanings in different contexts. Sometimes, they are kept by banks and finance companies as collateral against loans taken by individuals. Individual assets can also be termed as security. Let us understand how Securities work.
How securities work
Securities are often a means of investment by which municipalities, companies or other commercial, as well as financial enterprises, can raise new capital. Depending on an institution’s market demand and the pricing structure, raising capital through securities can be a preferred alternative to financing through a bank loan. Securities are readily traded as they allow you to own the underlying asset without taking possession.
It is here that you, the investor becomes involved in the functioning of securities. When the businesses issue securities in the form of stocks, bonds, money markets, etc., Investors buy them and hence provide that business the capital it needs. Once these securities are issued, they can be easily traded between the investors on the secondary market.
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Types of Securities
Securities are broadly categories into three types which are: Equity securities, Debt Securities and Hybrid Securities – Which is a combination of both the elements of Equity and debts.
What are Equity Securities?
Simply speaking, equity securities are investments in stock issued by another company which is realized in the form of capital stocks (defined as the number of common and preferred shares that a company is authorized to issue). Typically, those who hold equity securities are not entitled to any regular payments but can profit from capital gains when they sell their securities (which may or may not increase in value). One of the premier advantages of Equity security is that it entitles the holder to some control of the company through voting rights. Equity securities are sometimes offered as payment-in-kind.
What are Debt Securities?
A debt security refers to the money that is borrowed and must be repaid on a maturity date with a specific rate of interest having a fixed amount and a renewal date. Debt securities include government and corporate bonds, certificates of Deposit (CD). Debt securities do not entitle the holder any control over the company and do not offer any voting rights. They are typically issued for a fixed term, by the end of which they can be redeemed by the issuer.
What are Hybrid securities?
Hybrid securities are the amalgamation of both debt and equity securities. Examples of hybrid securities include equity warrants, convertible bonds, and preference shares.
Trading with Securities
It is obvious that securities can be traded, either publicly or privately. Publicly traded securities are listed on stock exchanges where issuers of the security can seek security listings and attract investors by ensuring a liquid and regulated market in which to trade. Securities are often traded ‘over the counter’ or directly between investors either online or offline.
Conclusion
Securities have a vast field of understanding and after having mentioned everything above, it is safe to say that securities are a dynamic concept that has evolved into a major type of financial investment and therefore it is essential to learn everything one can about Securities. Bankquality.com is a dedicated platform to bring you the best there is to know about the financial market, from understanding banks, digital wallets, investments to securities, we cover all the essential parts there are to cover about finance. Click here and join our community of reviewers TODAY!