What Is a Security?

What Is a Security?

By Charles Joseph | Editor, Financial Affairs
Reviewed by Corey Michael | Senior Financial Analyst

A security is a financial tool that holds value and can be traded. It represents an ownership position in a publicly-traded corporation via stock, a creditor relationship with a governmental body or a corporation represented by owning that entity’s bond, or rights to ownership as represented by an option.

Related Questions

1. What are the main types of securities?

The main types of securities include equities (stocks), debts (bonds), and derivatives (options). Equities represent ownership interest held by shareholders in an entity (a company, partnership or trust), realized in the form of shares of capital stock. Bonds are basically debt investments, where investors loan money to a company or government for a defined period at a fixed interest rate. Options are contracts that grant the right, but not the obligation to buy or sell an underlying asset at a set price on or before a certain date.

2. What is the role of securities in the financial market?

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Securities play a vital role in the financial market as they bridge the gap between borrowers and lenders. They allow companies to get funding for operations and enable governments to finance public projects. Investors can generate income from their investments through securities, supporting economic growth.

3. How are securities traded?

Securities are traded on securities exchanges, over-the-counter markets, and through automated electronic networks. Some securities are listed on an exchange, which means they can only be bought and sold on that exchange, while others are traded off-exchange, or over-the-counter.

4. Can securities become worthless?

Yes, securities can become worthless. If a company goes bankrupt and its assets are liquidated, common shareholders are the last in line to share in the proceeds. The company’s bondholders will be paid first, then holders of preferred stock. If there’s any money left, the common stockholders receive a proportionate share.

5. What are the risks associated with investing in securities?

Investing in securities involves risks such as market risk, credit risk, liquidity risk, and operational risk. Market risk involves the possibility of an investor experiencing losses due to factors affecting the overall performance of the financial markets. Credit risk is the risk that a borrower may not repay a loan and that the lender may lose the principal of the loan or the interest associated with that loan. Liquidity risk is associated with the inability to quickly convert assets or securities into cash without a substantial price reduction, and operational risk involves failure or inadequacies in internal procedures, people and systems.