Finance can be defined as money management and all those activities’ in which money is involved such as investing, saving, budgeting, lending or borrowing. Finance can be categories into three main types which are personal finance, corporate finance, and government finance. Investing personal money in stocks, borrowing money from financial institutions or lending money to the borrowers is a prime example of finance.
In simple words securities in finance are proof of ownership or debt which have been assigned a monetary value and may be sold for example stock market shares, bonds\saving bonds or security options. Technically security is a financial instrument normally any financial asset that can be traded in the financial market.
Normally securities can be categorized into three main types which are;
- Equity Securities
- Debt Securities
Equity securities mostly are stock market shares and a share of ownership in a public or private limited company or a listed company. Equity securities regularly generate earnings for the shareholders in the form of dividends mostly in favorable market conditions. Equity security may increase or decrease in value in financial markets depending upon a company’s performance or any change in government legislation.
Debt securities are entirely different from equity securities because money is borrowed by selling of security whereas in equity securities money is invested by purchasing stock or share securities. Debt securities are issued by the company or government body and sold to the third party for an agreed amount with the promise of repayment and interest on the amount of security. These securities are normally called debentures as they include a fixed amount, specified interest rate and date on which the total amount of the security has to be paid back to the debenture holder. Bonds, banknotes, and treasury notes are examples of debt securities. They are agreements between two parties for an amount borrowed and paid back with a certain rate of interest at the mentioned date or time.
Derivatives are a little bit different type of security because the value of derivatives is normally based on a primary asset which is then purchased and paid back, with the price, the agreed amount of interest and the date all specified and agreed at the time of the first transaction. The individual selling the derivative does not require claiming the ownership of the primary asset entirely. The seller of derivative can simply pay back the buyer with enough cash to purchase the primary asset or by offering another derivative that fulfills the amount of debt owed on the first transaction. A derivative normally derives its value from basic commodities like gas or precious metals like gold and silver which have prominent value in an open market.
Investing in securities
The bodies or companies who create the securities for sale is known as the issuer and those who buy them are investors. Companies or other commercial enterprises issue securities to raise new capital. Companies can generate money when they go publically listed or sell their shares in the stock market. Investing in securities, for example, buying shares in the stock market or issuing debentures can be a good way to make an increase in investment and earning profit.