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Security, Securities

By: EconomyWatch Content Date: 29 January 2010

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A security is a negotiable instrument representing financial value and may be represented by a certificate or a mere book or electronic entry. Securities can be debt securities, or equity securities issued to raise funds for some specific purpose. In recent years, securities have been used to repackage the existing assets of a company through a process called securitization.

Investment and Trading in Securities

The basic reason why investors buy securities is their desire to earn some income or achieve a capital gain. While debt securities offer a higher rate of interest than fixed deposits, equity securities offer the opportunity of capital growth. Equity securities also offer the investors a chance to become a part of the business. Securities are increasingly being used as collateral as well.

Securities markets can be divided into primary and secondary. In primary markets securities are issued to investors through initial public offerings and secondary offerings. The proceeds of these go directly to the issuer. However, in case of the secondary markets, securities are traded on the stock exchange by various investors at the same time. The secondary market for securities offers liquidity and encourages investors to invest in the primary market.

Classification of Securities

Traditionally, a security can be dividend into debt, equity or hybrid. Debt Securities can be called debentures, bonds, deposits, notes or commercial paper depending on their maturity and other features. These securities are generally issued for a fixed term and are redeemable at the end of the term. Debt securities may be secured or unsecured by a collateral and entitle the holder to principal and interest. These securities can be long term instruments such as bonds and debentures or short term instruments such as commercial paper or notes.

Equity securities represent a share of equity interest in a company or a holding. Equity can be common stock or preferential stock. Equity holders enjoy the right to profits and capital gains. Hybrid Securities (such as preference shares) share some features with both equity and debt.

A country’s regulatory structure determines what qualifies as a security. Securities can be issued by commercial banks, government agencies, local authorities, private companies and even international organizations.