Types of Securities
Securitiesrefer to types of ownership which are operated on a secondary market.These forms of ownership allow a person to own the casual assetwithout acquiring it (Amadeo, 2016). And that is why securities areeagerly traded of which in business terms are recognized as extremelyliquid. They are leading indicators of the assets’ value becausethey are efficiently priced. Securities and Exchange Commission setlaws to be followed by the traders involved in selling or buying thescurrilities. Therefore, it means that there must be the issuance ofa license to allow the commencement of the security business. Thispaper seeks to describe three different types of securities.
Mainlythere are three types of securities namely equity, debt, andderivatives (Amadeo, 2016).
Thistype of securities permits a person to offer bonds or loans to acorporation or a state. It is applicable in rating companies such asMoody and Fitch, Standard and Poor (Amadeo, 2016). Additionally, itis characterized by fixed interest rates or coupons which are paid atfixed intervals like monthly, annually or semiannually. The corporatebond is usually sold over the counter by investment dealers in themarkets of bonds. Some of these bonds offer release privileges(Amadeo, 2016).They are stable and safe because the bond holder isassured of a steady amount of proceedings at the end of a particularperiod. Nevertheless, the holder does not have the right to vote orto receive interests. A successful sale of bonds entails borrowerspaying high coupon rates if their charges are under AAA ratings. Junkbonds have very low scores, but they are most preferred by investorsbecause they give high levels of interests.
Thisis a type of securities which allows a person to possess theownership of a company through shares. It is also referred to asstock (Amadeo, 2016). Buying stocks are same as buying the propertyof the enterprise. The characteristics of equity securities includevoting rights of a shareholder and profit entitlement. Additionally,the price of the stock fluctuates highly hence making it be ahigh-risk investment. As a result, the investors usually acquire thesecurity when its price is small and dispose of it when the price islarge. Even though stocks are known for their riskiness nature, theyhave a high potential for more earnings.
Thereare two ways of buying stocks. The first one is when a personpurchases shares directly from a company. The second way involvesbuying shares from secondary market or the equity markets. Investments banks such as Morgan Stanley and Goldman sell InitialPublic Offering of a new company. NASDAQ and New York Stock Exchangeare examples of secondary markets of shares (Amadeo, 2016).
Thisis a contract which is obtained through ways which can allow a personto acquire high profits but in a less risk way. Underlying bonds andstocks are developed as innovative derivatives to serve the highpurpose (Amadeo, 2016). The derivative contracts are characterized bytrading in shares not including the upfront purchase. Additionally,they also involve a little initial fee to buy a call alternative ofbuying the shares at a specified price and date. In case the priceshikes, people can apply their option of buying the stock at theirlower negotiated charges then instantaneously resell them at theupper level of actual costs. The other type of derivatives is thefuture contract of commodities like currencies, pork bellies, and oilamong others. They work in the same way as options, but they are moredangerous in that the person enters into an actual contract thanpurchasing an option that can be ignored. Other types include swapsand forwards (Amadeo, 2016). A significant number of derivatives areoperated on an exchange or off-exchange for instance in Bombay StockExchange.
Inconclusion, the three types of securities include equity, debt, andderivatives. While debts are bonds or loans purchased by a bondholder, equity is stock or shares of ownership in a country. On theother hand, derivatives are contracts between parties whoseprinciples are grounded on contracted- upon underlying security,index and financial assets.
Amadeo,K. (2016). 3 You Must Know Before You Invest.Retrieved April 10, 2017, fromhttps://www.thebalance.com/securities-definition-and-effect-on-the-u-s-economy-3305961
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