Securities are financial instruments that represent some form of value or ownership and can be traded between parties. Think of them as the building blocks of most investment portfolios—stocks, bonds, and a long menu of other products. Companies use securities to raise capital. Investors use them to seek profit, manage risk, or gain exposure to different parts of the market.
Types of Securities
1. Equities (Stocks and Shares)
When you buy a company’s stock, you own a slice of that business. Equities give you voting rights (sometimes), a claim on future earnings (via dividends), and the chance for capital appreciation if the company grows. Stocks are traded on exchanges and are known for price swings—sometimes sharp, sometimes slow and steady.
2. Debt Securities (Bonds)
Bonds are IOUs issued by governments, municipalities, or corporations. When you buy a bond, you’re lending money in exchange for regular interest payments (the “coupon”) and the return of your original investment at maturity. Bonds are often viewed as less risky than stocks, but they come with their own risks: default, interest rate moves, and inflation.
3. Derivatives
Derivatives get their value from an underlying asset, such as a stock, bond, commodity, or even an index. Options, futures, swaps, and forwards all fall into this category. They’re used to hedge risk, speculate on price changes, or manage exposure without owning the underlying asset directly. Derivatives can be complex and high risk.
4. Investment Funds
These include mutual funds, ETFs (exchange-traded funds), and unit trusts. Investors pool their money to buy a basket of assets, managed by a fund manager or algorithm. The fund itself is a security, and you own shares or units in it.
5. Other Securities
There’s a huge variety: preference shares, convertible bonds, depositary receipts, mortgage-backed securities, structured products, and more. Each has its own risk, reward, and complexity profile.
How Securities Are Traded
- Exchanges: Stocks, some bonds, and many ETFs trade on regulated exchanges like the NYSE, NASDAQ, LSE, and others. Prices are transparent, and trades are matched through central order books.
- OTC (Over-the-Counter): Some bonds, derivatives, and smaller company shares trade directly between parties, usually broker-to-broker, without a central exchange. This can mean less transparency but more flexibility in structuring deals.
- Electronic Platforms: Modern trading happens mostly online, through broker apps, direct market access, and automated matching engines.
Why Securities Matter
Securities let companies raise funds, governments finance projects, and investors save, grow, and manage their money. They also spread risk—by owning a mix of stocks, bonds, and funds, you’re less exposed to any single loss. But all securities carry risk: prices can swing, issuers can default, and complex products can blow up if misunderstood.
Regulation
Most securities are tightly regulated. Authorities like the SEC (US), FCA (UK), and others require disclosures, fair dealing, and investor protection. There are strict rules on how securities are issued, traded, and promoted—mainly to stop fraud, market abuse, and financial instability.