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What are Securities in Investments?

Security is a financial asset holding a monetary value and representing ownership of the financial asset like shares and stocks, bonds, options, etc. There are mainly 2 types of securities, equities, and debts. However, you will also see a third category namely hybrid being a blend of equity and debt.

What are the Types of Securities?

There are three main types of Securities. These are:

  1. Equity Securities: Equity refers to stocks and shares by way of which the shareholder claims ownership of the Company. The earnings of a shareholder are usually in the form of dividends. The listed Equity Security is volatile and rises and falls as per the market conditions.
  2. Debt Securities: Debt Securities are instruments like government bonds, certificate of deposits, corporate bonds, treasury bills etc. These are bought and sold with a promise to repay the same with interest. Here, the rate of interest, the amount borrowed and the maturity and renewal date is predetermined.
  3. Derivatives: It is a kind of investment Security wherein the value of an investment is derived from other underlying assets. It is a contract between two or more parties where the value of the investment is agreed to be derived from underlying financial assets. 

These underlying financial instruments can be commodities, bonds, currencies, stocks, etc.

What are the two major types of Equity Securities?

The two major types of Equity Securities are:

  1. Common Shares: The common shares represent ownership of the shareholder, a claim over earnings, and net assets on liquidation along with voting power, involvement in decision making. 
  1. Preferred Shares: Preferred shares have a preference over common shares in the event of claiming the company’s earnings or dividends and assets during liquidation..are. 

What is the difference between debt securities and equity securities?

The following are the main difference between debt securities and equity securities :

  • In Debt securities the rate of interest, the amount borrowed and the maturity and renewal date is predetermined while equity securities are volatile and rise and fall in accordance with the market conditions. 
  • Debt securities are basically loans that pay interest over a period of time while equity securities confer an investor with ownership rights over the company he has bought shares of.
  • In Debt securities, the return is in the form of fixed income while in equity securities the return comes in the form of dividends. 

What is the difference between the securities market and the stock market?

Securities market is a part of the financial market where securities are traded. Securities market encompasses the equity market, bond market and derivative market. Traditionally, the securities market is used in the economy to attract new capital.

Securities market does not have a specified place of trade. The trading usually happens over the counter (OTC). The horizon of investment in the securities market is longer in nature.

Stock market on the other hand includes only tradable shares, it can be equity shares or preference shares. Stock market has a central place of exchanges where shares are bought and sold. 

What are tax-free Government Securities?

Under Tax-free Government Securities the income so generated is tax exempt. The returns of an investment are free from the local, federal and state taxes.

These investments are generally available in the form of bonds backed by Government or Government bodies. The other characteristics of these types of tax-free securities are-

  • longer tenure (10 years or more),
  • lock-in period, and 
  • fixed interest rates.

Municipal Bonds are examples of Tax-free Government Security in India.

Published on October 2, 2020