What are Securities?
Securities, in the realm of finance and economics, are financial instruments that hold some type of monetary value. They represent an ownership position in a publicly-traded corporation (via stock), a creditor relationship with a governmental body or a corporation (represented by owning that entity’s bond), or rights to ownership as represented by an option.
Types of Securities
Securities can be broadly categorized into two main types: Equity securities and Debt securities.
- Equity Securities: These are securities that represent ownership interest held by shareholders in an entity (a company, partnership or trust), realized in the form of shares of capital stock.
- Debt Securities: These are securities representing money that is borrowed and must be repaid, with terms that define the amount borrowed, interest rate and maturity/renewal date. Bonds are a common form of debt securities.
What are Securities Used For?
Securities play a crucial role in the financial market. They are used by companies, governments, and individuals for various purposes.
- Raising Capital: Companies issue securities to raise funds for their operations and projects. This is done through the issuance of stocks (equity securities) or bonds (debt securities).
- Investment: Individuals and institutional investors buy securities as an investment, with the hope that the securities will increase in value or provide income.
- Government Funding: Governments issue securities, usually in the form of bonds, to fund public projects and services.
How Do Securities Work?
Securities work on the basic principle of risk and reward. When an investor purchases a security, they are essentially either lending money to the issuer or buying a part of the company. The issuer, in return, promises to pay back the amount (in case of debt securities) with interest or share a part of the profits (in case of equity securities).
Trading of Securities
Securities are traded on securities exchanges, over-the-counter markets, and, increasingly, electronically. The prices of securities are determined by supply and demand. The value of a company’s securities often reflects the market’s assessment of the future earnings of that company.
Regulation of Securities
Securities are regulated to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. In the United States, the Securities and Exchange Commission (SEC) is responsible for enforcing the federal securities laws.
Understanding the Importance of Securities
Securities are a cornerstone of the global financial system. They provide a way for companies to raise capital, for governments to fund public projects, and for investors to grow their wealth. Understanding what are securities and how they work is essential for anyone interested in finance, investing, or the broader economy.