What are Securities?

//What are Securities?
What are Securities? 2017-10-10T06:16:01+00:00

Definition: Securities are negotiable financial instruments issued by a company or government that give ownership rights, debt rights, or rights to buy, sell, or trade an option.

What Does Securities Mean?

What is the definition of securities? Securities are traded on the exchange markets. Although the term refers to all types of financial instruments, there are differences in its legal definitions, which mostly consider equities and fixed income as securities.

Nevertheless, securities can be stocks, bonds, mutual funds, interest-bearing Treasury bills, notes, derivatives, warrants, and debentures. Furthermore, interests in oil-drilling programs are also considered securities. The legal entity that issues securities is the issuer of the security.

Securities differ in their level of inherent risk. For example, equities are considered riskier than bonds, but also some equities are riskier than other equities. Depending on the level of risk that an investor wants to accept, he selects the relevant securities. Moreover, securities differ in their level of liquidity. Highly liquid securities like bonds, equities and money market instruments are traded more frequently because investors can increase their price by buying more securities and realizing a higher return on investment.

Let’s look at an example.

Example

Emmanuel buys 100 stocks of Microsoft because it is a large cap stock that trades frequently and has a high return potential. By acquiring the Microsoft shares, Emmanuel automatically acquires ownership rights to the company’s dividend payments. Therefore, the next quarter that Microsoft will declare a quarterly dividend, Emmanuel will collect the relevant payment.

In addition, Emmanuel $400,000 in a checking account, and he decides to put 50% in government bonds. He doesn’t like too much risk, so he is going conservatively and on the safe side. By purchasing the bonds, Emmanuel gets a legal proof of the purchase and acquires the bonds, which acknowledge ownership of the security and a creditor relationship with the US government.

Summary Definition

Define Securities: A security means an investment instrument issued by a government, a company, or other organization that represents a financial value and an acknowledgment of ownership to distributed profits.