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In Economics and Finance, security is a financial instrument that holds monetary value. Security represents rights of ownership presented as a certified agreement, a certified creditor relationship with a corporation as a bond or ownership position in a publicly traded corporation in terms of company stock.
Securities have two broad, significant categories ;
- Equities
- Debts
Equities
Equity security refers to the partial ownership interest that shareholders in a company, partnership or trust have in the form of capital stock. Capital stock refers to the number of common and preferred shares that a company is allowed to issue according to its corporate charter. Capital stock includes shares of common stock and preferred stock. Equity security holders receive periodic dividends according to the number of shares that they hold. Assuming that the value of the company is increasing, can also benefit from capital gains when they sell their securities. In cases of bankruptcy or the company's impending collapse, equity shares give proportionate rights to the shareholders where the more shares one has, the more the votes one has in the decisions made in the company. Shareholders, in this case, will only share the residual interests that remain when all creditors have been paid after bankruptcy.
Debts
These securities refer to money that has been issued to corporations as loans and must be paid within the time stipulated and according to the conditions that have been put down. The payment of debts depends on the amount of money that has been borrowed, the interest rates set forthwith and the time duration agreed by the parties. Debt securities entitle the holder to regular payments of the increasing interest and the principle of whether or not the company is performing well in the market or not. Debt securities can either be secured by collateral or unsecured but supported by a contractual document. Debt securities include government bonds or corporate bonds.
Hybrid securities
Hybrid securities are a conglomerate of both equities and debts. Examples of equity securities are equity warrants, convertible bonds, and preference shares.
ROLE OF SECURITIES IN BUSINESS
Securities provide a means that companies and corporations can raise new capital for financial and business endeavors. Companies generate large sums of money when they go public and sell their stock in the initial public offering, IPOs. The issuer creates the security for sale and the investor purchases the securities in the market. Publicly traded securities are listed in markets known as stock exchange markets, and the issuers seek investors and ensure a regulated market for them to trade in. Issuers have developed avenues online where investors can directly trade among themselves. This is known as an over-the-counter stock trade.
As the name suggests, IPO represents the first initial sale of equity securities to the public; subsequent sales are known as secondary offerings. Securities can also be sold privately to a prequalified group of individuals or companies. This is known as a private placement. There are strict rules and regulations involved with the private placement, and it is important for companies to seek legal guidance before commencing trade. After markets or secondary markets allow investors to trade and transfer assets between one another, they can trade their securities for cash or capital gain freely.
The other types of securities include;
Certificated securities
Certificated securities are securities that are presented in the paper form. They are held in the direct registration system as records of share stock in book-entry forms. Recently modern technology and policies have eliminated the need for physical certificates, and almost all securities are held in electronic form.
Bearer securities
These are securities that have been transferred from one investor to the other. They are negotiable and allow the shareholder to the rights that are under the security. These securities are most commonly divided and held as separate assets. This means that at the end of the loan the borrower can return assets equivalent to the original asset or a specific identical asset.
Registered securities
These securities bear the name and details of the holder and are maintained in the register by the issuer. Any transfer of registered securities occurs through updates and amendments to the register. Registered securities are usually undivided, and all components and securities are considered to be part of a whole. Restricted securities also known as letter securities cannot be sold in the marketplace. They are only sold directly by the issuer to the investor.
Residual securities
These are a type of security that can be changed from one form to the other. They are also known as convertible securities. Corporations prefer to issue residual securities to attract customers to provide them with investment capital when competition in the market becomes competitive. Conversion of residual shares causes an increment of outstanding shares, and this affects the earnings per share for the company. When this happens, companies take measures to consolidate and reduce the number of common shares which increases the value of each share. This attracts potential investors.
You can read more information on securities here, finance homework help.