Security

The definition, types and all you need to know about securities

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A security is a redeemable, negotiable instrument associated with a financial value. Securities are broadly divided into debt securities (such as banknotes, bonds and debentures); equity securities, e.g., common stocks; and derivative contracts, such as forwards, futures, options and swaps. The issuer is the company or other entity issuing the security. What qualifies as a security is determined by a country's regulatory structure. For example, private investment pools may contain features of securities, but they are not allowed to be registered or regulated as such if they meet various restrictions.

Securities may be in the form of a certificate or, more typically, "non-certificated", that is in electronic or "book entry" only form. Certificates may be bearer, meaning they acquire the holder rights under the security merely by holding the security, or registered, meaning they entitle the holder to rights only if he or she appears on a security register maintained by the issuer or an intermediary. They include corporate stock shares or mutual fund shares, corporations issued bonds or governmental agencies issued bonds, stock options or other options, limited partnership units, and various other formal investment instruments that are negotiable and fungible.

Classification

Securities may be classified according to many categories or classification systems:

• Currency of denomination
• Ownership right
• Term to maturity
• Degree of liquidity
• Income payments
• Tax treatment
• Credit rating
• Industrial sector or "Industry". ("Sector" often refers to a higher level or broader category, such as Consumer measures, whereas "industry" often refers to a lower level classification, such as Consumer Appliances. See Industry for a discussion of some classification systems.)
• Region or country (such as country of incorporation, country of major sales/market of its products or services, or country in which the principal securities exchange on which it trades is located)
• Market capitalization
• State (typically for municipal or "tax-free" bonds in the U.S.)
• By type of issuer

Commercial companies, government agencies, local authorities and international and supranational organizations are among Issuers of securities. Debt securities issued by a government generally carry a lower interest rate than corporate debt issued by commercial companies. Interests in an asset—for example, the flow of royalty payments from intellectual property—may also be turned into securities. These repackaged securities coming from a securitization are usually issued by a company established for the purpose of the repackaging—called a special purpose vehicle (SPV). See "Repackaging" below.

New capital

Commercial enterprises have usually used securities as a means of raising new capital. Securities may be an attractive option relative to bank loans depending on their pricing and market demand for particular characteristics. Another disadvantage of bank loans as financing source is that the bank may seek a measure of protection against default by the borrower via extensive financial covenants. Through securities, capital is provided by investors who purchase the securities upon their initial issuance.

 

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