Securities

Securities are financial instruments that represent an ownership position, a creditor relationship, or rights to ownership as represented by an option. They can be classified into two broad categories: equity securities, such as stocks, and debt securities, such as bonds.

Types of Securities

• Equity Securities: These securities indicate ownership in a company and include common stocks and preferred stocks. Holders of equity securities have a claim on the company’s assets and earnings.
• Debt Securities: These represent loans made by investors to borrowers, typically corporate or governmental. Common forms include bonds and debentures. Debt security holders are entitled to receive interest payments and principal repayment at maturity.

Market of Securities

The securities market is where these instruments are bought and sold. It can be divided into:

• Primary Market: This is where new securities are issued, and firms raise capital directly from investors.
• Secondary Market: This is where existing securities are traded among investors, providing liquidity to securities holders.

Example of Securities

Consider a company, XYZ Corp, that issues shares and bonds:

– XYZ Corp sells common stock for $50 per share. If you purchase 10 shares, you own a portion of the company and could receive dividends.
– Additionally, XYZ Corp issues a bond with a face value of $1,000 and an annual interest rate of 5%. If you buy one bond, you will receive $50 annually until maturity.

Calculation Example for Debt Securities

Let’s calculate the interest income from the bond:

• Face Value: $1,000
• Annual Interest Rate: 5%
• Interest Payment: Face Value x Interest Rate = $1,000 x 0.05 = $50

Thus, if you hold the bond until maturity, you will earn $50 each year for the life of the bond, in addition to receiving the $1,000 face value back at maturity.

Understanding securities is crucial for investors, as they represent a way to invest in companies and governments while taking on varying levels of risk and return.