What Are Securities?

Many people wondering what securities are may not realize that they're likely already familiar with this investment category. The most common examples include stocks and bonds.

Along with commodities, securities offer investors a way to grow the value of their money. Securities can increase or decrease in value because of a variety of factors. This can be most clearly seen in the day-to-day volatility of the Dow Jones Industrial Average.

Let’s review the different types of securities and how they make—and occasionally lose—money for investors.

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What are securities?

A security is a financial investment with some monetary value. It entitles the holder to ownership of a part of a publicly traded company, such as a stock, or a debt obligation, such as a bond.

Securities are listed on the stock exchanged and can be bought, sold, or traded on the secondary market.

Types of securities explained

Securities are broadly categorized as either an equity or a debt. In simple terms, equity securities are stocks, and debt securities are bonds. Each one behaves differently and has its own risk profile that determines how much an investor can make.

Equity securities

Equity securities are most often shares of a publicly traded company stock. They offer a way for companies to grow beyond securing private funding. When a company declares an Initial Public Offering (IPO), it starts selling stocks on the open market (also known as the secondary market).

By selling stocks which represent shares of ownership for the investor, the company can raise capital to grow the business or repay debt obligations. As an investor, you make money by buying the stock and selling it at a higher price or through dividends.

Dividends are a way for the company to share profits with investors. Stocks that pay out dividends are more volatile and thus riskier.

Debt securities

“Debt securities” most often refers to bonds. When a company or a government entity wants to borrow money, it can either get a loan or issue a bond. But bank loans to fund big projects are difficult to secure.

This is where bonds come into play. The company can issue a debt security called a bond to raise money. When investors buy bonds, they are lending the company money. It entitles them to getting their money back with interest once the bond matures.

Let’s look at an example. If a school district wants to build a new school, they can issue a bond to fund the project. Investors who buy the bond will lend money to the school district while expecting to get paid back through interest.

This arrangement works well both for investors and companies issuing bonds. Bonds are less volatile than stocks, helping balance out investment portfolios. The company issuing the bonds also gets the loan to meet its financial needs.

Marketable securities

Marketable securities are a way for companies to make money on their cash reserves. These types of securities are liquid with an expiration term of less than a year. They offer lower returns in exchange for liquidity.

Companies keep cash on hand to make payments or take advantage of opportunities. Instead of parking the money where it won’t earn interest, they invest a portion of the cash into short-term liquid securities. These investments can be sold quickly if the business needs the cash.

There are two types of marketable securities: marketable equity securities and marketable debt securities. Marketable equity securities are usually shares of common stock or preferred stock traded on the stock exchange. Marketable debt securities include corporate bonds and government bonds.

Mortgage-backed securities

Mortgage-backed securities or MBS for short, are investments secured by mortgages. Here’s how they work: An individual gets a mortgage from a bank or a mortgage company. The bank or mortgage company turns around and sells the loan to an investment bank to generate liquidity for new loans.

Investment banks bundle these mortgages based on common characteristics and sell them as mortgage-backed securities. When the mortgages are bundled into MBOs, they can be moved off the books to free up more money for lending.

The MBS bundles can be sold on the secondary market to institutions, corporations and individuals. When you buy an MBS, you have the right to a portion of the value of the bundle. This includes part of the monthly mortgage payments and principal for the entire pool.

Mortgage-backed securities played a big role in the stock market crash of 2008 and the financial crisis that began in 2007. As home values increased, investors wanted a piece of the pie, and mortgage-backed securities delivered.

However, when the real estate bubble burst, the value of these MBS bundles plummeted as more people walked away from their mortgages, causing mass losses for investors and institutions.

The Federal Reserve stepped in to create a market for unloading MBS bundles through the Troubled Asset Relief Program (TARP). This injected capital back into banks who were struggling under the weight of the overvalued MBSs.

Fixed-income securities

A fixed-income security is an investment that pays out on a regular schedule. The interest payments are fixed in value and paid out periodically until maturity when the principal is returned.

One of the most common types of fixed-income securities are bonds. Governments or corporations issue bonds to fund projects. Bonds come with different ratings assigned by credit-rating agencies.

These ratings tell investors how likely it is for a corporation or a government to repay a bond. Bonds are divided into investment grade and non-investment grade, also called junk bonds.

Investment grade bonds are issued by companies and governments at a low risk for default with corresponding lower returns. Junk bonds offer higher returns to account for the higher probability of default by the issuers.

Some of the most popular types of fixed-income securities are Treasury notes, Treasury bonds, Treasury bills, municipal bonds and dividend stocks.

Treasury notes or T-notes for short, are issued by the U.S. Treasury. They come with different maturities ranging from two to 10 years. Their value and semiannual interest payments are backed by the U.S. government,

T-bonds are another type of fixed-income security backed by the U.S. government. They mature in 30 years and are sold on auction on TreasuryDirect.

T-bills are the short-term version of government-backed fixed-income securities. They mature within one year and don’t pay interest. Investors make money by buying T-bills at lower than face value. They are paid out the value when the bill matures and make their money on the difference between how much they paid and received for the T-bill.

Local governments issue municipal bonds to fund capital projects such as building hospitals and schools. Interest earnings are exempt from federal income tax and may also be exempt from state and local taxes.

The role of securities in the economy

Securities are a way for investors to make money by lending them to companies and governments. By buying a share or a bond, an investor is voting for that company’s future growth. Securities inject money into the economy, helping both the investor and the issuer. However, they also cause the stock market to fluctuate, sometimes wildly.

Most investors will do well with a diversified mix of low-fee assets such as Wealthsimple Invest. This offers a consistent return that spreads the risk over different sectors and types of investments.

Some investors purchase securities based on a hot stock tip and not proper research. Putting too much of their money into one stock or investment product can cause big losses. This is one issue that precipitated the Great Depression in 1929 when many lost all of their savings.

Another example is derivative investments such as mortgage-backed securities. In the 2000s, many investors bought these because they considered them less risky. As investment banks went further down the subprime mortgage rabbit hole, this was no longer the case.

When the housing bubble burst, many were left with MBSs they couldn’t sell. The Federal Reserve had to step in and offload the derivatives to pull financial markets back from the edge of collapse.

This was one of the precipitating factors that caused the global financial crisis and resulting Great Recession in 2008.

Pros and cons of investing in securities

Investing in securities, such as stocks and bonds, has its positives and negatives. Historically, the stock market has gone up, helping investors grow their money over time and beat inflation.

However, that’s not the whole story. As the Great Depression of 1929 and the Great Recession of 2008 show, markets are prone to steep declines. Investors can just as easily lose money buying securities.

Here are the pros and cons of investing in securities:

Pros

A good hedge against inflation over the long run

Takes advantage of economy growth

Easy to buy and sell

Provide many ways to make money from dividend stocks to bonds

Cons

Come with the possibility of losing your entire investment

Subject to stock market ups and downs, which can mean an emotional roller coaster for an investor

Require a lot of research

Bottom line: securities offer a good hedge against inflation, but you need to be careful not to risk more than you can afford to lose.

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What are securities and how do you trade them?

Did you know that securities offer investors one of the best ways to grow their capital? Many of you may already be familiar with investing in securities such as stocks and bonds. However, in the digital era, there are now many different types of securities available for investors; which means learning about them in detail is hugely important to be a successful investor.

In this article, we will cover:

What are securities in finance?

The different types of securities available: What are equity securities? What are debt securities? What are marketable securities?

How to start investing in securities

How to buy and sell equity securities

And much, much more!

What are securities in finance?

The term security refers to any negotiable financial instrument. Some common examples include stocks and bonds. Another way to define securities are as financial contracts which grant the owner a stake in an asset and which can be bought and sold.

What are securities - Different types explained

As world economies have developed there are now a variety of different types of securities available for investors. Generally speaking, the two most common types of securities that investors are interested in are equity securities and debt securities.

1. What are equity securities?

Equity securities are probably the most commonly known form of securities and refer to shares of publicly traded companies, such as Apple shares, BP shares, and so on. When a business wants to grow it needs funding. Companies can either borrow the money from a bank, find private investors or go to the capital markets and issue shares, or securities, to raise capital.

If you go on to buy a security, or a share, in a publicly-traded company which is offering them, then - in effect - you are purchasing ownership in the company. As the company makes profit you can share in the profits by collecting a dividend or a potential rise in the company's share price. You can learn more about dividends in The Best Dividend Stocks for Income article.

Did you know that with an Invest.MT5 account you can buy and sell equity securities such as stocks from 15 of the largest stock exchanges in the world? You can also create a stream of passive income by collecting dividend payouts and open an account with just a €1 minimum deposit. You can get started right now by clicking the banner below:

2. What are debt securities?

Debt securities are most often referred to as bonds. If a company or government wants to borrow money they can either try to get a loan from the bank or they can issue a bond. After issuing a debt security (a bond), investors who buy the bonds are effectively lending the issuer money. The bond entitles the holder, or purchaser of it, their money back - with interest - once the bond matures.

Investing into debt securities such as bonds is much more complex than investing into equity securities such as shares. In fact, the corporate bond market is mainly for institutional traders and investors. However, there is a way to still capitalise on debt securities and these are through products such as ETFs ( Exchange Traded Funds). You can learn more about these in our 'How to Start Investing in ETFs with €1,000' article.

For example, investors could gain exposure to debt securities, such as bonds, through the Vanguard Long-Term Bond ETF. According to Vanguard's product page, this ETF primarily invests into government bonds. This product and many more are available to invest in through the Invest.MT5 account. You can also view a chart of historical prices in the MetaTrader 5 trading platform which is provided by Admiral Markets UK Ltd for free, as shown below:

The Admiral Markets MetaTrader 5 trading platform showing a chart of the Vanguard Long-Term Bond ETF, its contract specification and the symbols window.

Disclaimer: Charts for financial instruments in this article are for illustrative purposes and does not constitute trading advice or a solicitation to buy or sell any financial instrument provided by Admiral Markets (CFDs, ETFs, Shares). Past performance is not necessarily an indication of future performance.

Did you know that you can download the MetaTrader 5 trading platform provided by Admiral Markets completely FREE? After downloading it you can view historical prices of, and trade on, a wide range of instruments covering multiple asset classes. Having the platform will also prove useful in a later section when we go through a step by step process on how to buy and sell securities like shares. You can start your free download by clicking the banner below:

Before we look into how to start investing in securities, let's look at a few other types of securities first.

3. What are fixed-income securities?

A fixed-income security is an investment that pays out interest on a regular schedule until maturity when the principal is paid back. In effect, fixed-income securities are debt securities of which the most popular type is a bond.

4. What are mortgage-backed securities?

Mortgage-backed securities, or MBS for short, are investments that are secured by mortgages. When an individual gets a mortgage from a bank, the bank then turns around and sells the loan to an investment bank to generate more capital for new loans.

The investment bank then may package a collection of these mortgages and sell them as a mortgage-backed security. These can then be bought and sold on the secondary market to other institutions.

This type of mortgage-backed security played a big role in the stock market crash of 2008 and is highly controversial.

5. What are marketable securities?

Marketable securities are a way for companies to make money from their cash reserves. A company will hold cash in its reserves in case they need to act quickly to take advantage of an acquisition, for example.

Instead of sitting on this cash, gaining no interest, the company will invest a portion of the cash into short-term liquid securities. These marketable securities tend to mature in less than a year so investments can be converted into cash very quickly and are mainly comprised of debt securities such as corporate bonds and equity securities such as shares.

Now you know a little more about the different types of securities available, let's go through how you can start to buy and sell securities yourself.

What are securities - How to buy and sell equity securities

Buying and selling securities such as shares and ETFs can be done in just three simple steps:

Open a stocks and shares trading account. Download your share trading platform. Open a trading ticket and take your first trade!

1. How to open your Invest.MT5 equity securities account

If you haven't done so already you can follow the steps below to open an equity securities account. If you have done so already, feel free to jump to the next section on how to download your equity security trading platform.

To open an account simply visit the Admiral Markets homepage and click on the green button labelled Create Account:

Then fill in the details required such as your name, email and password:

Once this is done you will have instant access to the Trader's Room! From here, you can open different types of trading and investing accounts:

After clicking the green button labelled Open Live Account, you can select the account you wish to open. For investing in equity securities such as stocks and shares, select Invest.MT5:

From here you can open your Invest.MT5 stocks and shares investing account after filling out an application, uploading required documents and going through a verification process. Once this has been done, and your application has been approved, you are ready to download your MetaTrader 5 stocks and shares trading platform.

For a more detailed overview on opening a MetaTrader 5 account, read the 'How to Open a MetaTrader 5 Account' article.

2. How to download your MetaTrader 5 stocks and shares trading platform

From the Trader's Room homepage, navigate to the bottom and select the MetaTrader 5 for PC or MetaTrader 5 for Mac download links:

Simply follow your computer's prompts to complete the download of your MetaTrader 5 stocks and shares trading platform.

3. How to place a trade in the MetaTrader 5 stocks and shares trading platform

Open up your MetaTrader 5 stocks and shares trading platform and follow these steps to place a trade:

Open the Market Watch window by selecting View from the menu at the top of the platform or by pressing Ctrl+M on your keyboard. This will open up a list of tradable symbols on the left side of your chart. Right-click on the Market Watch window and select Symbols or press Ctrl+U on your keyboard. This will then open the window shown below which details all the markets available for you to trade on. From here you can add a wide variety of shares to your Market Watch window by selecting the relevant share or country and clicking Show Symbol.

The Admiral Markets MetaTrader 5 trading platform showing a chart of the Vanguard Long-Term Bond ETF, its contract specification and the symbols window.

Disclaimer: Charts for financial instruments in this article are for illustrative purposes and does not constitute trading advice or a solicitation to buy or sell any financial instrument provided by Admiral Markets (CFDs, ETFs, Shares). Past performance is not necessarily an indication of future performance.

After clicking the OK button in the Symbols window you can now view the different instruments in the Market Watch window. To view a price chart of a company's share price, simply left-click on one of the stock symbols in the Market Watch window and drag it onto the chart area. From here you can now open up a trading ticket:

Right-click on the chart. Select Trading. Select New Order, or press F9 on your keyboard. A trading ticket will open for you to input your entry price, stop loss and take profit levels and your share trading size (volume).

An example of the MetaTrader 5 trading platform provided by Admiral Markets, showing a trading ticket window.

Disclaimer: Charts for financial instruments in this article are for illustrative purposes and do not constitute trading advice or a solicitation to buy or sell any financial instrument provided by Admiral Markets (CFDs, ETFs, Shares). Past performance is not necessarily an indication of future performance.

To learn more about the MetaTrader 5 trading platform, feel free to watch the video below:

What are securities - Why buy and sell equity securities with Admiral Markets?

If you are considering buying and selling equity securities, or gain exposure to debt securities through bond ETFs, you may consider the Invest.MT5 account where you can enjoy benefits such as:

The ability to invest in thousands of stocks and ETFs from 15 of the largest stock exchanges in the world.

Open an account with just €1 minimum deposit and invest from just $0.01 per share with minimum transaction fees of just $1 on US stocks.

Receive free real-time market data, with no delays, at no extra cost.

Create a stream of passive income by collecting dividend payouts.

Use the world-renowned MetaTrader 5 multi-asset class trading platform.

You can get started right now by clicking the banner below and enjoying all of the features above and more!

Find more interesting articles:

About Admiral Markets

Admiral Markets is a multi-award winning, globally regulated Forex and CFD broker, offering trading on over 8,000 financial instruments via the world's most popular trading platforms: MetaTrader 4 and MetaTrader 5. Start trading today!

This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or recommendation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.

What are securities? Definition and meaning

Securities are contracts to which we give a value and then trade. This may be a bond, a mortgage-backed security, or a share. In the UK, ‘gilts’ are the equivalent of US Treasury securities.

A security is a financial instrument, a monetary contract between parties which people trade.

Put simply, a security is any proof of ownership or debt that has a value and that we can sell.

We usually divide them into debt securities, equities, and derivative contracts:

Debt Security – this represents money that an entity has borrowed and must pay back. The arrangement is detailed beforehand, including how much is borrowed, at what interest rate, plus renewal or maturity date.

A certificate of deposit (CD), for example, is a security. So are corporate bonds, government bonds, and preferred stock.

Equity security – refers to the ownership interest in a company by shareholders, such as shares (stock). A holder of an equity security can profit from capital gains.

If the company makes a good profit, the equity security holder shares in this gain. This is not the case with a holder of a debt security. A debt security only gives you interest and the repayment of the capital.

Traditionally, companies raise new capital through securities, which offer certain advantages over bank loans.

Derivative contracts – we also call them ‘derivatives’. They represent a contract between two parties that specify conditions, such as dates, resulting values and definitions of the underlying variables, the contractual obligations of each party, and the notional amount that the two parties established for making and receiving payments.

Examples of derivatives include options, swaps, futures, and forwards. Variations of forwards such as caps, floors, collars, and credit default swaps are also derivatives.

Traders buy and sell most derivatives through an exchange, such as the Chicago Mercantile Exchange. We can also trade them off-exchange, over-the-counter.

Security – guarantees on loans

When an individual is taking out a loan, ‘security’ could mean collateral, an asset that the borrower pledges. If the borrowers fails to pay back the money, the lender can subsequently seize that asset.

In many countries, when people take out a mortgage, the house is the security, the collateral.

If the borrower cannot repay the loan, the lender has recourse to seize the home and sell it.

Certified securities

A certified security is in paper, physical, form. There are two different types:

Bearer securities – these are negotiable financial instruments which contain no information on ownership. The bearer is presumed to be the owner – they can be bought and sold to anyone. However, because of increasing digitization, this type of security is becoming rare.

Registered securities – any virtual security which people trade is a registered security. The owners’ names are recorded by a registrar – the issuer or the issuer’s agent.

U.S. Securities and Exchange Commission

The U.S. Securities and Exchange Commission is the U.S. federal agency that makes sure day traders and other security traders obey the law. A day trader is somebody who buys a security and sells it on the same trading day.

To draw an analogy, it is similar to what the FDA (Food and Drug Administration) is for the pharmaceutical, food and medical device industries. However, it focuses on security traders rather than drug makers. The SEC makes sure that traders are honest and fair. It also protects investors.

The SEC can impose fines, referral for criminal prosecution. It can also revoke or suspend traders’ licenses.

The SEC writes on its website:

“The mission of the U.S. Securities and Exchange Commission is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.”

Some countries have one large agency that covers all financial products. The United Kingdom, for example, has the Financial Services Authority (FSA).

Trade organizations for securities dealers

The main trade organization for securities dealers in Europe is the International Capital Market Association.

The main trade organization for securities dealers in the U.S. is the Securities Industry and Financial Markets Association.

Most securities are bought and sold in capital markets. Examples of highly-organized capital markets are NASDAQ, the New York Stock Exchange, and the London Stock Exchange.

Video – What are securities?