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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?

Different parties trade securities in the open market. Following are the four different types of securities:

  1. Equity Securities: Equity refers to stocks and shares. It represents the ownership interest held by shareholders in a company. The earnings of a shareholder are usually in the form of dividends. Also, listed equity securities are volatile and are the prices rise or fall as per the market conditions.
  2. Debt Securities: Debt or fixed income securities represent that the money is borrowed and shall be repaid with interest upon maturity. These securities include government bonds, certificate of deposits, corporate bonds, treasury bills etc. These are bought and sold with a promise to repay the same with interest. Also, the debt agreement predetermines the rate of interest, the amount borrowed, the maturity and renewal date.
  3. Derivative Securities: The value of derivatives securities depends on the underlying asset. The underlying asset can be stocks, bonds, interest rates, market indices, interest rates, or goods. It is a contract between two or more parties. Where the value of the investment is derived from underlying financial assets. The main purpose of derivatives is to minimise risk. One can achieve it by insuring against the price fluctuations. The different types of derivatives are future, forwards, options, and swaps.
  4. Hybrid Securities: Hybrid security is a type of security that has both debt and equity securities characteristics. Many institutions use hybrid securities to borrow money from investors. Examples of hybrid securities are convertible bonds, where the bondholder can convert to equity stocks during the bond tenure or at maturity. Preferred stocks, these allow the holder to receive dividends prior to common stockholders.

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 stock and securities?

Securities are investments that are easily convertible to cash. On the other hand, stocks are one type of securities. Some of the other types of securities are bonds, ETFs, futures and options, banknotes, real estate, etc. Most securities trade on the exchange or in the secondary market.

Stocks are securities, not different, just that stocks are a type of securities. Securities are broadly classified as ownership securities, debt securities and derivative securities. Ownership securities are stocks. Debt securities are notes and bonds. Derivatives securities derive value from the price fluctuations or changes of other securities or commodities.

A stock is one type of security that belongs to the equity class. An investor would always invest across multiple securities to have diversification to their portfolio and to address volatility (risk). Investing in just one asset class like stocks would lead to high fluctuations in the portfolio returns. On the other hand, having investments across different securities will help in generating good returns in all market scenarios.

Stocks represent an ownership interest in a company; on the other hand, securities like debt allow the borrower to borrow funds, derivative securities for hedging or speculative purposes.

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. 

Read also about the Bonds vs Stocks

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.