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What Is A Security?

Views 15242022.03.01

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Key takeaways

  • A security is a certificate which proves that the holder has a particular right, such as ownership or creditor's rights

  • In some cases, securities allocate capital more efficiently by connecting investors to those demand financing

  • There are four types of securities: equity, debt, hybrid, and derivative securities

  • Securities have different risk, profitability, and liquidity profiles. It's almost impossible to find one with low risk, high profitability, and good liquidity at the same time. Moreover, many securities have maturity dates

Understanding a security

In the 17th century Netherlands, the East India Company raised money from the public and engaged in voyages, which generated huge profits. Inthe form of notes, which are considered the predecessor of securities, it promised to pay dividends to investors.

In short, a security is a certificate which proves that the holder has a particular right, such as ownership or creditor's rights. Over time, securities have gradually become paperless.

To be more precise, when we say financial securities, we actually refer to securities that can be seen as financial assets or instruments. They have values and prices. They can be traded and can generate income for their holders.

Stocks are a type of security that easily pops into our mind, but there are other examples like bonds, mutual funds, options, and so on.

What can securities do? Governments or companies use securities to raise capital, for example, issuing bonds or through IPO. Investors trade securities to make a profit.

Based on this situation, securities can allocate social capital more efficientlyby connecting investors to those demand financing.

Financial activities related to securities are regulated by the securities regulatory agency. In the U.S., the agency is called the Securities and Exchange Commission (SEC). In addition, there are some self-regulatory organizations to help coordinate securities-related activities.

Types

There are four types of securities.

1. Equity securities

A stock is a typical example of equity securities. An equity security provides the holder with a proportion of ownership of a company.

Holders may get dividends at certain times. When they sell a security at a higher price than what they paid, they can also get capital gains.

An equity security rises and falls in value according to many complex factors. So, on the one hand, holders may get returns from the company's growth. But on the other hand, they face high risks also.

2. Debt securities

Corporate bonds, government bonds, and certificates of deposit are all debt securities.

When you buy a debt security, it means that you lend a certain amount of money to the security issuer, which can be a bank, a company, or a government.

The issuer usually should give you a regular interest payment at a pre-determined rate and repay you the principal amount of money on the maturity date. But some particular securities like zero-coupon bonds don't work that way.

It seems that debt securities are safer than equity securities, but we shouldn't ignore the risks, for example, default, which means the issuer fails to repay principal or interest.

3. Hybrid securities

Some securities combine characteristics of both equity and debt securities. We can call them hybrid securities.

Hybrid securities include convertible bonds which can be converted into common shares and preferred shares whose payments of capital returns will be prioritized over ordinary shares.

4. Derivative securities

The value of a derivative is based on its underlying assets. Futures, forwards, options, and swaps all belong to this category.

For example, an option gives its buyer the right to buy or sell a specified quantity of assets at a pre-agreed price in a given time frame.

Investors usually use derivative securities to speculate or hedge against risks.

Characteristics

There are four main characteristics of securities.

1. Risk

All securities have risks. Different securities have different levels of risks.

2. Profitability

Investors usually can profit from securities. But since risks are involved, returns are not guaranteed. Risks are related to returns. The higher the returns may be, the greater the risks will be. But don't jump to the conclusion that securities with high risks will certainly lead to high returns.

3. Liquidity

It means the ease at which a security can be traded. It's almost impossible to find a security that has low risk, high profitability, and good liquidity at the same time.

4. Maturity

Maturity means the date on which the life of a security ends. Many securities have certain maturities.

The content in this article is intended for general circulation and informational purposes only. It does not take into account the investment objectives, financial situation or needs of any particular person and should not be relied on as advice or recommendation. Information provided in this article are not specifically intended for or specially targeted at the public in any specific jurisdiction. Neither Moomoo Inc. nor its affiliates are licensed Financial Advisers and do not provide financial advice. You are advised to consult your financial adviser before making any commitment to invest in any capital markets product. The information published is not and does not constitute or form part of any offer, invitation or solicitation to subscribe or to enter into any transaction in capital markets products. Moomoo is a professional trading app offered by Moomoo Inc. In the U.S., investment products and services on Moomoo are offered by Futu Inc., Member FINRA/SIPC. In Singapore investment products and services are offered through Futu Singapore Pte. Ltd., regulated by the Monetary Authority of Singapore (MAS). This advertisement has not been reviewed by the MAS. Moomoo Inc., Futu Inc. and Futu Singapore Pte. Ltd are affiliated companies. Any illustrations, scenarios, or specific securities referenced herein are strictly for illustrative purposes. Past investment performance does not guarantee future results. Investing involves risk and the potential to lose principal.

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