- Security in the financial context refers to an asset which can be traded and commands a monetary value
- Securities are broadly classified as debt and equity
- Debt securities are those financial instruments that represent money which is borrowed and has to be repaid
- Equity securities represent the ownership held by shareholders in a company, trust or partnership which is realized through shares of capital stock
What is Security?
Security in the financial context refers to an asset that can be traded and commands a monetary value. It can represent a creditor relationship with a company or a government body through owning bonds of that entity or an ownership position in a corporation by owning stocks of that company or rights (not obligation) to ownership through an option.
Types of Securities
Debt securities are those financial instruments that represent money which is borrowed and has to be repaid according to the terms which mention interest rate, loan size, renewal, or maturity date. Debt securities usually give their holder an entitlement to the regular interest payments and principal repayment. Examples of debt securities are corporate and government bonds, collateral securities, and certificates of deposit. They are usually issued for a specific term, after which the issuer can redeem them. Debt securities are of two types that are secured and unsecured. Secured debt securities are the ones which are backed by collateral. Unsecured debt securities either do not have any collateral backing them up, or there are some cases in which they are contractually prioritized over another unsecured debt.
Equity securities represent the ownership held by shareholders in a company, trust, or partnership, which is realized through shares of capital stock. Unlike debt securities, the equity shareholders are not usually entitled to get regular payments. Equity securities often pay out dividends to the shareholders. These securities often give the holders some control of the business on a pro-rata basis through voting rights. Upon bankruptcy, the company only shares the residual amount after all the creditor’s obligations have been paid out.
Hybrid securities combine some components of both debt and equity. Equity warrants, convertible bonds, and preference shares are some examples of hybrid securities.