Securities are tradable financial instruments that represent financial value, usually in the form of an asset. The legal definition of securities depends on the jurisdiction in which they are being traded.
In the United States, they are primarily regulated by the U.S. Securities and Exchange Commission (SEC) with the help of Self-Regulatory Organizations (SROs). They can be broken down into three main categories, which we will discuss below.
How Do Securities Work?
What Is an Example of a Security?
Examples of securities include stocks, bonds and mutual funds. Other examples include preferred shares, futures, options, and swaps. Marketable securities include assets that can be converted to cash quickly, usually within a 12 month time frame.
How Are Securities Traded?
Securities are traded through the stock market, as well as secondary markets. The stock market contains a network of exchanges that include the New York Stock Exchange (NYSE) and the Nasdaq. Stock markets are also seen all over the world, including Japan, London, the European Union, Australia, Shanghai and Hong Kong.
How Are Securities Issued Through Capital Markets?
Public companies sell their securities to investors, usually to increase their investor base or bring in additional capital. Once they are sold, the investor holds a type of ownership within the company or corporation.
Types of Securities
Securities can be broken down into three main categories; debt, equity, and derivatives. Let’s review these examples below.
Debt securities most commonly include bonds, which can be government issued or issued by corporations. They involve an agreement to repay a fixed amount plus interest within a specific frame of time with an end date in mind. Their ownership can be transferred from one owner to another at any time.
Equity securities typically include shares of stock owned by shareholders. Those who own shares of stock are able to profit once they sell their shares. They’re also able to profit if a company pays out dividends.
Derivatives are a type of security that obtains their value from another asset, referred to as a benchmark. Common types of derivatives include futures, forwards, swaps and options. Additionally, the price, interest to be paid, and maturity date of a derivative are all specified at the initial time of purchase.
Where Can You Invest in Securities?
There are several places in which you can purchase or invest in securities. In North America, you can go to a brokerage, bank, or individual investor or company.
Individual retirement accounts (or IRAs) allow an individual to set aside money for their retirement. There are certain tax advantages that come along with investing in IRAs, specifically tax-deferred or tax-free growth. Moreover, it’s important to keep in mind that there are certain restrictions or limitations that come with investing in either traditional or Roth IRAs.
An important factor to note with IRAs includes the fact that withdrawing any contributions or earnings before the age of 59 ½ are subject to a 10% tax penalty. However, there are some exceptions to this set forth by the IRS, including withdrawing money for certain medical expenses or paying off college tuition bills.
A brokerage account is the most commonly used method to buy and sell securities. These funds are available to be used whenever and however you wish. More importantly, there are no fees associated with opening or maintaining your brokerage account, which can give plenty of flexibility to most individuals.
Brokerage accounts can be used to trade stocks, set aside money for retirement, long-term investing, or for other savings goals whether they be long-term or short-term.
An annuity is a contract made with an insurance company over a specific period of time, usually a person’s lifetime. These can be purchased using a series of payments over time or with a lump sum payment. Additionally, they can be used as funding for retirement with long-term goals in mind.
Keeping retirement in mind, annuities can be a means of steady income once an individual has reached the annuitization phase. This usually occurs after the accumulation phase or when the individual is actively paying into their annuity.
What Are Hybrid Securities?
Hybrid securities are simply that; a hybrid of two different financial instruments. Typically, these combine aspects from both debt and equity securities. Some examples include equity warrants or preferred stocks. However, one of the most common examples is a convertible bond.
A convertible bond gives the option to convert it into a different type of security at a later date. The value of a convertible bond will depend on the company’s stock price at any given time. They are usually issued by a brokerage.
Why Invest in Securities?
Investing in securities can be beneficial because it allows individuals to maximize investments and help build their savings. Something to consider, however, is the age in which you begin to invest. That being said, there are different options for everyone.
Getting Started With Securities
Securities are tradable financial instruments in the form of assets, usually stocks and bonds. In the United States, they are primarily regulated by the Securities and Exchange Commission (SEC).
While investing in securities can be risky, it is important to note that financial advisors are available to help. Consulting with a financial advisor can assist you with making the right decision for your retirement and future.