Kinds Of Securities tm6u

Introduction A security is a financial instrument that represents an ownership position in a publicly-traded corporation (stock), a creditor relationship with governmental body or a corporation (bond), or rights to ownership as represented by an option. A security is a fungible, negotiable financial instrument that represents some type of financial value. Securities include shares of corporate stock or mutual funds, corporation or government issued bonds, stock options or other options, limited partnership units, and various other formal investment instruments . A security is a tradable financial asset. The term commonly refers to any form of financial instrument, but its legal definition varies by jurisdiction. In some jurisdictions the term specifically excludes financial instruments other than equities and fixed income instruments. In some jurisdictions it includes some instruments that are close to equities and fixed income, e.g. equity warrants. In some countries and/or languages the term "security" is commonly used in day-to-day parlance to mean any form of financial instrument, even though the underlying legal and regulatory regime may not have such a broad definition. The company or other entity issuing the security is called the issuer. A country's regulatory structure determines what qualifies as a security. For example, private investment pools may have some features of securities, but they may not be ed or regulated as such if they meet various restrictions. Securities may be represented by a certificate or, more typically, "non-certificated", that is in electronic (dematerialized) or "book entry" only form. Certificates may be bearer, meaning they entitle the holder to rights under the security merely by holding the security, or ed, meaning they entitle the holder to rights only if he or she appears on a security maintained by the issuer or an intermediary. They include shares of corporate stock or mutual funds, bonds issued by corporations or governmental agencies, stock options or other options, limited partnership units, and various other formal investment instruments that are negotiable and fungible.

Functions of Securities Generally, securities represent an investment and a means by which companies and other commercial enterprises can raise new capital. Companies can generate capital through investors who purchase securities upon initial issuance. Depending on an institution's market demand or pricing structure, raising capital through securities can be a preferred alternative to financing through a bank loan. On the other hand, purchasing securities with borrowed money, an act known as buying on a margin, is a popular investment technique. In essence, a company may deliver property rights, in the form of cash or other securities, either at inception or in default, to pay its debt or other

obligation to another entity. These collateral arrangements have seen growth especially among institutional investors.

Kinds of Securities There are many different securities that you can invest your money in. They're usually divided into two categories debts and equities. A debt security represents money that is borrowed and must be repaid, with that define the amount borrowed, interest rate and maturity/renewal date. Debt securities include government and corporate bonds, certificates of deposit (CDs), preferred stock, etc. Equities represent ownership interest held by shareholders in a corporation, such as a stock. Unlike holders of debt securities who generally receive only interest and the repayment of the principal, holders of equity securities are able to profit from capital gains. Here's a quick refresher on some of the most popular security investments. 

Debt securities

These include debentures, bonds, deposits, notes and commercial paper (in some circumstances). Debt securities are usually fixed term securities redeemable at the end of the term, they may be secured or unsecured or protected by collateral. Debt securities may offer some control to investors if the company is a start-up or an established business undergoing 'restructuring'. In these cases, if interest payments are missed, the creditors may take control of the company and liquidate it to recover some of their investment. People favor buying debt securities because of the usually higher rate of return than bank deposits. However, debt securities issued by a government (bonds) usually have a lower interest rate than securities issued by commercial companies.

 Equity securities Common stock is the most popular type of equity security. Investors are called shareholders and they own a share of the equity interest of capital stock of a company, trust or partnership. It is like saying someone who invests in equity securities is buying a tiny part of a company (or a large part, depending on your budget!). On the plus side, investing in equity securities can gives a shareholder access to profits and capital gains, something debt securities will not. The holder of debt securities receives only interest and repayment of principal no matter how well the issuer performs financially. Equity investment may also offer control of the business of the issuer.

 Derivative contracts A derivative is a security with a price that is dependent upon or derived from one or more underlying assets. The derivative itself is a contract between two or more parties based upon the asset or assets. Its value is determined by fluctuations in the underlying asset. Derivatives either be traded over-the-counter (OTC) or on an exchange. OTC derivatives constitute the greater proportion of derivatives in existence and are unregulated, whereas derivatives traded on exchanges are standardized. OTC derivatives generally have greater risk for the counterparty than do standardized derivatives. A derivative is perhaps obviously, derived from some other asset, index, event, value or condition (known as the underlying asset). Rather than trade or exchange the underlying asset, derivative traders enter into agreements to exchange cash or assets over time based on the underlying asset. A simple example is a futures contract: an agreement to exchange the underlying asset at a future date.

 Stocks Stocks are the best known equity security. You're purchasing an ownership interest in a company when you buy stock. You're entitled to a portion of company profits and sometimes shareholder voting rights. Stock prices can fluctuate greatly. Investors try to buy stock when the price is low and sell it when the price is high. Stock has a higher investment risk than most other securities. There's no guarantee that you won't lose money. However, stock usually has the potential for the greatest returns. Most stock is considered common stock. Preferred stock normally offers dividends but not voting rights. Common stockholders also have greater potential for higher returns.

 Shares A share is an equity security. Its owner owns one part of the capital of the company which has issued the shares in question. The shares enable the shareholder the right to take part in the decision-making in the company. If the latter operates with profit, the owners of shares may receive dividends. The amount of the dividend is decided upon by the shareholders at a General Meeting of the Shareholders.

 Corporate Bonds A corporate bond is a debt instrument issued by a company. It's a loan to the company when you invest in a bond. You're entitled to receive interest each year on the loan until it's paid off.

Bonds are safer and more stable than stocks. You're guaranteed a steady income from bonds. However, bondholders aren't entitled to dividends or voting rights. In addition, stockholders have potential for greater returns in the long run.

 Government Bonds Government bonds are issued by the US federal government. The most common are US Treasury bonds. They're issued to help finance the national debt. Government bonds have very low investment risk. In fact, they're virtually risk-free since they're guaranteed by the US government. However, the potential return is lower than stocks and corporate bonds.

 Municipal Bonds Municipal bonds are debt securities from states and local government entities. These local entities include counties, cities, towns and school districts. The interest income you earn on the municipal bonds is usually exempt from federal income taxes. It may also be exempt from state and local income taxes if you live where the bonds are issued. However, the interest rate is usually lower than corporate bonds.

 Open-end funds An open-end fund stands for a diversified portfolio of securities and similar investments, chosen and professionally managed by a fund management company. Since the fund does not have fixed capital but is rather 'open ended', it grows together with new investors ing and thus funding it. Open-end funds can invest in domestic and international securities, in either shares, bonds or other investment vehicles. Depending on the portfolio, the fund's risk and returns vary accordingly.

 Mutual Funds A mutual fund is made up of a variety of securities. It may focus on stocks, bonds or a collection of both. Your money is usually pooled with other investors. An investment company chooses the securities and manages the mutual fund. This diversity helps decrease investment risk.

 Stock Options A stock option is the right to buy or sell a stock at a certain price for a period of time. A call is the right to buy the stock. A put is the right to sell the stock. Stock options can be used to help reduce your investment risk.

 Futures Options A futures contract is an agreement to sell a specific commodity at a future date for an agreed upon price. A futures option is the right to buy or sell a futures contract at a certain price for a specific period of time. Many investors use futures options to help reduce investment risk.

 Investment certificates Investment certificates are debt securities issued by a bank, and are designed to offer the investor an agreed yield under pre-defined conditions stipulated in the prospectus. Issuers are mainly large banks, and an important criterion in selecting the bank in whose investment certificates you would like to invest is its credit rating. Investment certificates represent an investment directly linked to an index, share price, raw material price, exchange rate, interest, industry, and other publicly available values. The holder of an investment certificate does thereby not become an indirect owner of the assets underlying the certificate. A certificate ensures the investor a guaranteed manner of payment. Investment certificates are predictable and the investor can always anticipate their yield (or loss) in a specific situation, which makes them a successful investment vehicle in times of heavy market losses. There are different types of investment certificates – some guarantee yields no matter what the situation on the market, while others yield profit only when the prices fall, etc.

 Warrants Warrants are options issued by a t-stock company, which give holders the right to purchase a certain quantity of the respective company’s shares at a pre-determined price. After a certain period, the right to purchase shares terminates.

Securities Market a) Primary and secondary market Public securities markets are either primary or secondary markets. In the primary market, the money for the securities is received by the issuer of the securities from investors, typically in an initial public offering (IPO). The primary market is concerned with the floatation of new issues of shares or bonds. The firms floating new issues to raise funds may be new companies or existing companies planning expansions. The Merchant Banking Division of a commercial bank is asked by the company to advice on the viability of floatation of an issue before an issue is actually floated in the market. In the secondary market, the securities are simply assets held by one investor selling them to another investor, with the money going from one investor to the other. This market provides both liquidity and marketability to such securities. It implies that it is a market where a security can be

bought or sold at small transaction cost. Although the Secondary Market deals with the purchase and sale of old securities, the firms issuing new securities get themselves ed on a Stock Exchange by applying for listing of shares.

b) Public offer and private placement In the primary markets, securities may be offered to the public in a public offer. The most popular method for floating securities in the New Issue Market is through a legal document called the “Prospectus”. It is an open invitation to the public to subscribe to the issue at par or at . Alternatively, they may be offered privately to a limited number of qualified persons in a private placement. An unlisted company which wants to raise equity funds but is not yet prepared to make an IPO may place privately its equity or equity related instruments with one or more sophisticated investors such as financial institutions, mutual funds, venture capital funds, banks etc. Sometimes a combination of the two is used. The distinction between the two is important to securities regulation and company law. Privately placed securities are not publicly tradable and may only be bought and sold by sophisticated qualified investors. As a result, the secondary market is not nearly as liquid as it is for public (ed) securities.

c) Over-the-Counter Markets An over-the-counter (OTC) market allows investors to trade securities without using organized stock exchanges. The trades are made by telephone or over an electronic network. There's no physical location. An OTC market is considered a dealer negotiated market. Brokers and dealers negotiate among themselves on prices for securities. The largest electronic network for the OTC market is called the National Association of Securities Dealers Automated Quotation System (Nasdaq).