As the name suggests, security is a financial asset. All securities, no matter what type they are, are tradable and can be bought and sold on the open market. The four major categories of securities that almost everyone in the world who invests knows about are debt securities, derivative securities, equity securities, and hybrid securities.
These securities can also be investments in which buyers do not share ownership but instead receive interest generated by the investment over time. Each of these securities has a different risk/reward profile, and an investor must understand this profile to evaluate whether or not an investment is appropriate.
Let’s look at these four common types of securities and how they might work for you.
1. Debt securities
Debt securities are those that are generally referred to as fixed-income instruments. Examples of debt securities include bonds, debentures, and most other instruments that require the investor to pay a fixed amount at regular intervals over the life of the security. An example of this type of security is a municipal bond. Fixed-income securities have historically been considered by many investors to be a relatively safe investment with regard to income, but they do carry risks in that they can lose some or all of their value if interest rates rise significantly.
2. Equity securities
Equity securities are those that represent ownership shares in a business venture or corporation. Common examples of equity securities include publicly-traded stocks and privately held stocks. In addition to stock, other equity securities might include preferred shares, convertible bonds, and warrants. Equity securities can have various rights that are attached to them, such as voting rights and dividend rights.
3. Derivative securities
Derivative securities are fairly complex financial instruments used by businesses or investors as a means of undertaking certain guarantees or speculations on the direction of an underlying asset in the financial markets. An example of derivative security is an option contract. Derivative securities are not necessarily tied to a particular business or company but can be tied to indicators from many different sources such as index prices for commodities, interest rates, exchange rates, and currencies.
4. Hybrid securities
Hybrid securities are a combination of debt and equity components. Depending on the nature of the hybrid security, debt and equity components can be in a fixed or variable ratio. An example of this type of security is a convertible debenture. Hybrid securities can be complex to understand, but they can offer some important tax advantages to investors.
Conclusion
Securities are by far the most complicated financial instruments that investors can buy and sell. With so many different kinds of securities, investors are subjected to a significant amount of risk. However, securities do offer many benefits over other types of investments. They tend to provide a reasonable amount of security with regard to income generation and can sometimes be used as tax shelters for certain types of investments. If you’re interested in trading any of these securities, it’s always best to consult a qualified broker before committing your money to any.