How About Securities?

Securities are a popular investment (and speculation) instrument on money markets. We present the review of securities with a brief explanation of how they work. Securities are usually defined as a financial instrument (a document with legal force and monetary value) issued by a company or a government evidencing ownership of equity (in the case of stocks) or debt obligations (when talking about bonds). The purpose of their issuing is thus twofold: to raise capital or to borrow money.

According to this differentiation in the purpose of their issuing, securities are usually divided into debt and equity securities. It could be said that securities help the economy by making it easier for those with money to find those who need investment capital. Apart from that, those who buy securities get either ownership in a company (when buying shares) or interest on the money they have borrowed (when buying bonds). Equity holders also enjoy the right to profits and capital appreciation through the payment of dividends, whereas holders of debt securities receive only interest and repayment of principal regardless of how well the issuer performs financially.

Equity securities are usually known as stocks. Debt securities come in the form of notes, bonds and commercial papers, depending on their maturity and certain other characteristics. Bonds may be issued by commercial entities in which case they are known as corporate bonds. They usually pay a fixed rate of interest and are repaid after a fixed period, known as their maturity, for example five, seven, or ten years. Debentures have a long maturity. There are also some highly liquid short-term forms of debt which are referred to as ‘near cash’. These include certificates of deposit, and certain bills of exchange.

When governments or their agencies issue debt securities, they are known as government bonds. Gilts or treasury securities are British government bonds, and in the US they call them treasury bonds. Since securities traders are always trying to find ways to make a higher return with less risk, innovative derivatives of basic stocks and bonds are often developed. These include futures contracts and call and put options.

Options are actually contracts stipulating that the buyer will purchase a specific item for a specific price at a specific time in the future. In that way sellers can protect themselves from negative trends involving their commodity or currency while futures buyers expect the price or value to increase in value at the specified future time. Options are different from futures only in the sense that they give its owner the right (or option) but not the obligation to buy (in the case of call options) or sell (with put options) a specific item at a specific price and point in time.

The advantage of securities over cash lies in the ease of their trading on the secondary financial markets. In order to be traded on highly regulated financial markets securities are checked by numerous regulatory bodies. Thus the reliable information on companies is easy to obtain, which in turn increases the trust of investors.