What are Securities?

What are Securities?

Definition

A security is a negotiable instrument that gives the holder certain rights. An equity share, which is a security, represents part ownership in a company. Similarly, a government bond establishes that the holder of the bond is a creditor of the government.

What does securities mean?

Stocks and bonds are the most common securities. A stock can pay the owner an income in the form of dividends. However, this is not guaranteed, and the company may reduce or even stop paying dividends if it does not make an adequate level of profits.

Bonds, on the other hand, promise the holder a regular payout in the form of interest. If a $1,000 bond has an annual coupon of, say, 6%, the holder will receive $60 in interest payments every year. On the maturity date, the issuer will repay the face value of the bond to the holder.

A share in a company is known as an equity security. A bond is a debt security and can also be referred to as a fixed-income security. There are also hybrid securities. These have certain attributes of an equity security while also possessing features that are usually found in fixed-income securities.

A preference share is an example of a hybrid security. These are also referred to as preferred stock, and they pay a fixed rate of dividend.

A derivative is another type of security. This financial instrument gets its name from the fact that its value is derived from an underlying asset. Futures contracts and forward contracts are examples of derivatives. The underlying asset is usually a stock or a bond or a currency.

Example of securities

Jeremy Balfour has $500,000 to invest. He wants to build a portfolio that will provide him with a steady income and also give him the opportunity to make capital gains.

He decides to buy municipal bonds of a value of $250,000 and invest the rest of the money in stocks. His financial advisor tells him that he can expect an annual return of about 5% from the municipal bonds.

The advisor also suggests that the money earmarked for stock investments be used to buy equity shares of Apple and Microsoft and other tech stocks. However, he warns that stock prices can be volatile and may lose value if the market falls.

Summary

Securities are financial instruments that can be purchased on an exchange. Stocks, bonds, and derivatives are examples of securities.