A security in financial world is any asset which can be financially traded. It is a type of entity which can be exchanged with other forms of goods or can be issued by the issuer in return for capital raised for projects. For example, government can issue government bonds to raise capital for infrastructure development and give a return on it accordingly. Securities includes equities, debentures, stocks, bonds etc.
A security can be broadly classified into three types:
Debt Securities
Debt securities are the type of securities which are issued by the holder in order to raise money in a short time. The issuer is entitled to pay off the capital raised along with the interests after a certain pre-defined period. This is to be decided in the clauses decided before issuing the security. For example, a company X wants to invest in a hydroelectric power plant in city Y, they need urgent capital for this. So they can issue a debt security in this case, raise capital and issue some returns in the form of interests on the security. They can be further classified into corporate bonds, government bonds (T-Bonds in the US), supranational bonds issued by international organizations, etc.
Equity Securities
An equity is nothing but your share in the company’s entities such as shares, ownership etc. A debt security requires an obligation for the issuer to give payments to the buyer, while Equity Securities are not entitled to any payment, rather they make profit/loss in accordance with the profit/loss made by the company. Common stocks of the company are a form of Equity Security. A debt security owner does not have a say in the company’s management and enjoys only repayment + interests. Whereas, an Equity Security owner has say in the management of the company and make capital gains or losses as made by the company.
You should also read our other article in the “Dumb’s Guide” Series-
Dumb’s Guide to Understanding Stocks and Stock Market
Dumb’s Guide to Investing Money in Stock Market
Dumb’s Guide to Understand the Balance Sheet
Derivatives
Derivative, as the name suggests is a form of security whose value is derived by one or more underlying assets. It can be served as an ‘insurance’ against varying value of an asset like stock, currencies, or any other asset. The transactions are done on a pre-fixed prices over the counter (unregulated) or in an exchange (BSE, NSE ). These days, derivatives have extended on many other things like speculating the amount of rain or number of sunny days in particular region during a season! They offer various types, notably forwards, futures, swap etc.
In India, the securities are regulated by a government body formed on 12th April 1992, called Securities and Exchange Board of India (SEBI).
