The term security in common usage denotes safety; however in financial parlance the term is taken to refer to a tradable financial asset. In fact this term denotes any kind of financial instrument currently available in the world.
Securities are further classified as either:
Equity securities
An equity security may be defined as a share of equity interest in an entity such as the stock of a limited company. The holder of such equity stock is referred to as a “shareholder” i.e. someone who holds a small part or “share” of the company that has issued the instrument. As a share holder, he acquires a limited control over the company that is equal to the percentage of the share he holds.
For example, if an individual has a 51% share in XYZ Company then he would be said to have “Controlling Interest” in the company and could hire and fire its management (subject to the rules and regulations as laid down by both company as well as the law of the land.) As part owner (regardless of how big or small his share may be) he is entitled to profits which may be delivered to him as dividends or through capital gains i.e. if he sells the shares at a price higher than his purchase price.
Debt or fixed income securities
These include both debentures as well as bonds and are dept instruments that are freely bought and sold by two parties. Unlike Equity, a debt instrument does not give the instrument holder any rights to the ownership of the company but it’s simply a loan that the buyer has given to the issuer. And as such the buyer is only entitled to the original principal amount as well as the (predetermined) interest accrued on the instrument.
The sale of financial securities to potential investors is one of the most important ways that publicly-traded companies accumulate capital for their day to day operations as well as capital investments.
Securities and exchange commissions
In most countries of the world the buying and selling in financial securities is regulated and controlled by “securities and exchange commissions” who are responsible for overseeing financial securities transactions not just through designated exchanges but by also regulating mutual fund companies who invest in financial commodities on behalf of their investors, for a pre-determined fee.
These “commissions” are responsible for the prevention of cheating, intentional fraud as well as deception in the securities markets under their jurisdiction. Their primary aim is to protect the interests of the investors and to help foster economic growth through the financial sector.
Further Reading
- Financial security of enterprises – www.sciencedirect.com [PDF]
- Financial literacy: Do people know the – journals.sagepub.com [PDF]
- Household financial management: The connection between knowledge and behavior – heinonline.org [PDF]
- The economics of small business finance: The roles of private equity and debt markets in the financial growth cycle – www.sciencedirect.com [PDF]
- Measuring the financial sophistication of households – pubs.aeaweb.org [PDF]
- The global governance of security and finance: Introduction to the special issue – journals.sagepub.com [PDF]
- Fire sales in finance and macroeconomics – www.aeaweb.org [PDF]
