What are Securities?

Securities are a type of financial instrument that is able to be owned without actually holding possession of it, and they are sold in secondary financial markets. A security is more of a representation of a portion of stock ownership in a publicly-traded corporation. It can also be an option, or the right to ownership of that particular representation. The entity the security comes from is called the issuer. Laws governing the trading of these types of instruments fall under the jurisdiction of the SEC, and traders must be specially trained in the buying and selling of these assets according to SEC regulations. It is the introduction of the security that helped to move the financial markets forward so successfully. Let’s take a look at the three types of security.

Equity Security

It is this type that allows for the owning of equity or “shares” of a company. As an individual, you can purchase shares of a stock on your own or you can also put money in what is known as a mutual fund, which invests in shares on your behalf. The secondary market for these kinds of shares is what is commonly referred to as the stock market. Other names for the stock market are the New York Stock Exchange and NASDAQ.

Debt Security

These are securities that are set up to let you give a type of loan to a corporation, sometimes even to a government, and are known as bonds. These bonds are given a rating by companies you may have hear of before such as Moody’s, Fitch’s or Standard & Poor’s. It is this rating that determines the likelihood of bond repayment. Borrowers with a low rating will pay a higher interest rate. Junk bond is the term used for extremely sub par ratings. These junk bonds still carry appeal due to their higher interest rate.

Derivative Security

Derivatives or stock options carry less risk because you can trade them without actually putting down your money right away. Instead, you’ll pay just a small fee for what’s called a call option, letting you purchase the stock at a set price. If your share goes up, you can decide to purchase it at your previously set price and turn right around and sell it for a profit.

Economic Effects

The security system impacts the economy by essentially matching those who have money to invest with those who are in need of capital. This opening up of the markets makes them more efficient. By doing well on the stock market, companies are rewarded with future investments and given incentive to grow further. As you may know, the downside to these financial instruments can also be this same convenience that allows individuals to invest without proper expertise. Many have lost great sums of money in this manner.

While securities are more complex than presented here, you now have an idea of the role these assets play in the stock market and our economy.

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