Securities definition

A financial security, otherwise known as a security, refers to a negotiable instrument that is fungible and holds some kind of monetary value. Popular ones include stocks, bonds, mutual funds, and Exchange-Traded Funds (ETFs). To be considered a security, an asset must allow traders the option to either buy or sell it on the market.

Types of securities

Securities can be broadly categorised as equities or debts. However, a few have mixed properties and are known as hybrid securities.

Equity securities

These securities are usually stocks and represent a share of ownership in a particular company. This includes both common and preferred stocks. Traditionally, the holders of these equities are considered shareholders.

While holders of equity securities do not typically receive regular payments apart from dividends, they can potentially profit from capital gains when they sell the security if the security has increased in value. Equity securities either increase or decrease in value depending on the performance of the company and financial markets.

Purchasing equity securities also generally entitle the holder to some degree of control of the issuing company, such as voting rights to determine how the company is run.

Debt securities

Debt securities are borrowed financial assets that need to be repaid. It includes terms regarding the size of the loan, its interest rate, and maturity or renewal date. Debt securities can include government and corporate bonds, certificates of deposit (CDs) and collateralised securities (such as CMOs and CDOs).

These securities entitle the holder to a regular payment of interest and repayment of principal, regardless of how the issuer is performing. However, it does not include voting rights.

Hybrid securities

As its name suggests, hybrid securities usually contain qualities of each characteristic. Examples include equity warrants, convertible bonds, and preference shares. Convertible bonds tend to be popular, as they have characteristics of a typical bond, but can also be converted into shares of common stocks.

Derivative securities

Unlike the above, the price of these securities is determined by the value of their underlying asset. The underlying asset can range from commodities to stocks, bonds, and more. It usually comes in the form of a contract between two parties. The contract will specify the conditions under which the buyer will make a payment to the seller. Common examples of derivatives include forwards, futures contracts, and options contracts.

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