What are Securities?

Published by Thomas Herold in Economics, Investments, Trading

'Securities' is explained in detail and with examples in the Investments edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.

Securities refer to financial instruments which stand for a position of ownership in a corporation which is publically traded. These would be stock shares. They could also be a creditor-like relationship to a corporation or a government entity or agency. This security would be called a bond. They might also be an option, which is the right but not obligation to acquire and own something. A security is ultimately a financial instrument that an investor or company can sell or transfer and which represents a kind of financial holding and value. The entity or corporation which provides the security to the investors is called the issuer.

There are two principal types of securities, equities and debts. Equities refer to shareholder-held ownership of a corporation. A stock is the most common example of these equities. Equity holders may receive dividends and sell their position to another party for a capital gain when the price increases to higher than they that for which they purchased it originally.

Debt securities are proof of creditor-borrower arrangements. These stand for money which a corporation or government agency borrows and which they must repay to the creditor. The debt security has terms which outline and specify the cash amount that they have borrowed, the maturity or renewal date, and the interest rate that applies. There are many forms of these debt instruments. The most common include CDs certificates of deposit, preferred stocks, corporate and government bonds, and CMOs or CDOs which are Collateralized Mortgage Obligations or Collateralized Debt Obligations.

Besides the standard forms of debt and equity types, there are also hybrid securities. They merge features of an equity and debt security together. Equity warrants are classic examples of this type of security. These are options that a company issues which provide its holders with the ability to buy stock shares in a given time frame for a pre-determined price. Convertibles are bonds which may be transferred into stock shares of common stock in the company which issues them. Preferred shares are actual shares of stock that pay dividends or interest ahead of the common stock class of shares.

Two main organizations regulate the issuance and sale of such a security within the United States. These are the SEC Securities and Exchange Commission and the FINRA Financial Industry Regulatory Authority.

Issuers of a security like this could be one of several different types of organizations. Municipal governments can issue bonds in order to raise specific project funding. Buyers of a security might be retail investors who purchase and sell them for their own accounts. Wholesale investors are those which trade the security as a financial institution working at the instruction for their customers and clients. There are also institutional investors which are a major category of security buyers. These include insurance companies, managed funds, pension funds, and investment banks like Goldman Sachs.

The purpose of a security is to float a debt or ownership instrument so that a commercial enterprise or government agency can raise fresh capital. By selling such a security, corporations are able to create money for business purposes and acquisitions. Sometimes the demand in the market place is strong enough and the pricing arrangements are favorable enough that it makes more sense for companies to issue securities to raise money rather than choose to borrow them in the form of loans or bonds. Government entities can not issue and float stock. Instead they may only issue debt in the form of general obligation or specific revenue bonds.

Securities which companies issue in the primary market they do in the form of an IPO initial public offering. Once these shares are floated and sold, all issued shares of stock are called secondary offerings. This is the case even when they still sell them in the primary market. Companies can also privately place such securities. There are cases where both private placement and public primary market floating takes place. The secondary market is the place where such a security becomes transferred from one investor to a different investor.

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The term 'Securities' is included in the Investments edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.