Securities offer investors one of the best ways to grow their capital. However, there are many different types of securities available for investors; which means learning what securities are and how they work is hugely important to be a successful investor.
Securities represent the most common investment contracts. Whether saving for retirement or seeking short-term opportunities, most people choose to put a portion of their investments into securities. These securities markets are also important for the economy, as they allow companies to raise capital from the public.
There is quite a bit you should know before you dive in. If you want to invest in securities right away, here is a quick guide:
- Select your securities – You can choose from stocks, bonds, and other financial instruments that hold value and can be bought, sold, and traded.
- Decide your strategy - trading lets you speculate on the price movement; dealing lets you take direct ownership of the securities.
- Take your position – create an account with us to gain access to more than 7,000 securities.
What are Securities?
Securities in finance refer to fungible, negotiable, and tradable financial instruments that hold some type of monetary value. Security can represent ownership in a corporation in the form of 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.
Although the term "securities" is commonly associated with stocks, bonds, and similar instruments, according to US laws, an investment can be regulated as a security if:
- There is an investment of money.
- The investment is made into a "common enterprise."
- The investors expect to make a profit from their investment.
Any expected profits or returns are due to the actions of a third party or promoter.
Under this rule, it does not matter if a securities offering is formalized with a legal contract or stock certificates; any type of investment offering can be a security.
What are the types of securities?
In most jurisdictions, the term broadly covers all traded financial assets and breaks such assets down into three primary categories:
- Equity securities – which includes stocks
- Debt securities – which includes bonds and banknotes
- Derivatives – which include options and futures
1. Equity securities
Equity almost always refers to stocks and a share of ownership in a company (which is possessed by the shareholder). Equity securities usually generate regular earnings for shareholders in the form of dividends. Equity security does, however, rise and fall in value in accord with the financial markets and the company’s fortunes.
If you have an aggressive outlook and a high-risk tolerance, equities are the go-to asset class. They can help you build adequate funds for different life goals, especially long-term ones, and ensure you address them with ease.
How Can You Invest in Equity Securities?
You can invest in this asset class in two ways: direct investment through stocks and investment via mutual funds.
- Direct investments through stocks: If you wish to invest in equities directly through stocks like Tesla or Apple, you need to open a trading account. A trading account is a place to buy and sell orders with your stockbroker through a stock trading platform. See the latest ranking with the best stocks to buy now.
- Investments through stock funds: Over the years, exchange-traded funds have emerged as one of the most popular financial instruments to build a corpus for different life goals. See the best ETFs for 2023.
Why Invest in Equity Securities?
Now that you know what equity securities are and the ways to invest in them, let’s understand the various benefits that equity investment brings to the table. Some potential benefits are:
- Inflation-beating Returns: With time, inflation brings down the value of money. For long-term goals such as children’s education and retirement, you need to invest in an asset class that has the potential to trounce inflation. Investing in equities can help you do so as they can generate inflation-beating returns in the long run.
- Capital Appreciation: Investing in equities can appreciate your principal capital by a significant margin. If you invest in an equity share of a fundamentally sound company, its price, likely, will appreciate with time. You can benefit from this capital appreciation.
- Dividend: While most equity securities usually do not entitle their holders to periodic payments, some do, and these payments are called dividends. These payments arrive even if the stock has lost value and represent income on top of any profits that come from eventually selling the stock.
2. Debt securities
Debt securities differ from equity securities in an important way; they involve borrowed money and the selling of a security. They are issued by an individual, company, or government and sold to another party for a certain amount, with a promise of repayment plus interest. They include a fixed amount (that must be repaid), a specified rate of interest, and a maturity date (the date when the total amount of the security must be paid by).
Bonds, bank notes (or promissory notes), and Treasury notes are all examples of debt securities. They all are agreements made between two parties for an amount to be borrowed and paid back – with interest – at a previously-established time.
How Can You Invest in Debt Securities?
You can invest in this asset class in two ways: direct investment through stocks and investment via mutual funds.
- Direct investments through bonds: You can trade bonds through most brokers just like you would trade stocks or indexes. The most popular bonds for retail investors are government-issued bonds in US, UK, or Germany, such as US 30Y Treasury Bonds 30Y, US 10Y Treasury Notes, UK 10Y Gilts, and German 10Y Bund
- Investments through bond funds: Bond exchange-traded funds (ETFs) are a type of exchange-traded fund (ETF) that exclusively invests in bonds and give your portfolio the opportunity to earn income from interest payments—unlike stock ETFs, which aim for long-term returns.
>> How to trade and invest in bonds
Why Invest in Debt Securities?
There are many benefits to investing in debt securities.
- Return on capital: Investors purchase debt securities to earn a return on their capital. Debt securities, such as bonds, are designed to reward investors with interest and the repayment of capital at maturity. The repayment of capital depends on the ability of the issuer to meet their promises – failure to do so will lead to consequences for the issuer.
- A regular stream of income from interest payments: Interest payments associated with debt securities also provide investors with a regular stream of income throughout the year. They are guaranteed, promised payments, which can assist with the investor’s cash flow needs.
- Means for diversification: Depending on the strategy of the investor, debt securities can also act to diversify their portfolio. In contrast to high-risk equity, investors can use such financial instruments to manage the risk of their portfolios. They can also stagger the maturity dates of multiple debt securities ranging from short-term to long-term. It allows investors to tailor their portfolios to meet future needs.
A derivative is a contract between two or more parties that derives its value from the price of an underlying asset, like a commodity. Financial derivatives instruments are often used to speculate on the underlying’s spot or future price movements, whether up or down, without having to own the asset itself.
A derivative often derives its value from commodities such as gas or precious metals such as gold and silver. Currencies are another underlying asset a derivative can be structured on, as well as interest rates, Treasury notes, bonds, indices, cryptocurrencies, forex, and stocks.
How do you trade derivatives?
Derivatives can be traded over the counter (OTC) or on exchange:
- Over-the-counter (OTC): OTC securities are traded without being listed on an exchange. Securities that are traded over the counter may be facilitated by a dealer or broker specializing in OTC markets. OTC trading helps promote equity and financial instruments that would otherwise be unavailable to investors.
- On-exchange: An exchange-traded derivative is a financial contract that is listed and traded on a regulated exchange. These are derivatives that are traded in a regulated environment. Futures and options are two of the most popular exchange-traded derivatives.
When trading with us, you’ll be taking a position on derivatives using CFDs. This means that instead of dealing on exchanges – which can be difficult and costly – you’ll be speculating on price movements exclusively.
Why Trade Derivatives?
The reason for investing in equity derivatives tends to fall into four reasons:
- Hedging: Hedgers use financial equity derivatives to reduce their existing risk or future exposure. An example might be an equity fund manager who wants to protect their downside risk on securities that they own but might not want to sell that security now. In this way, you can mitigate your risk by gaining some profit and limit your losses overall, without having to liquidate an investment portfolio.
- Speculation: This is a common, but risky, market activity for financial market participants of a financial market takes part in. Speculators take an educated gamble by either buying or selling an asset with the expectation of short-term gains. It is risky because the trade can move against the speculator just as quickly, resulting in potentially significant losses. As an inexpensive and highly liquid way to gain exposure to an asset without necessarily owning that asset, derivatives are a very important part of the arsenal for financial market speculators.
- Trading rising and falling markets: With derivatives, you can trade both rising and falling markets, meaning you can profit (or make a loss) even in a bear market or volatile economic environment. You’d go ‘long’ if you think the price of an underlying asset will rise; and ‘short’ if you think it’s going to fall. To open a long position, you’d elect to ‘buy’ the market. When going short, you ‘sell’ the market when opening your trade.
- Arbitrage: Arbitrage is the condition under which two equivalent assets or derivatives, or a combination of assets and derivatives sell for different prices. This allows an arbitrageur to buy at a low price and sell at a high price and earn a risk-free profit from this transaction without committing any capital.
- Margin trading: In finance terms, the margin is the collateral deposited by an investor with their broker or the exchange borrows money to leverage their investment power. By employing leverage, a trader can magnify gains but also may suffer larger losses. Equity derivatives are often used by margin traders, especially when it comes to stock indexes since it would be incredibly capital-intensive to fund purchases of every single stock that comprises the index basket.
4. Other securities
Some classifications also include hybrid securities as a major category. Hybrid securities combine some of the characteristics of both debt and equity securities, such as equity warrants (options issued by the company itself that give shareholders the right to purchase stock within a certain timeframe and at a specific price), convertible bonds (bonds that can be converted into shares of common stock in the issuing company), and preference shares (company stocks whose payments of interest, dividends, or other returns of capital can be prioritized over those of other stockholders).
Dealing vs trading securities: the differences in detail
While the terms are often used interchangeably, there’s a significant difference between ‘securities dealing’ and ‘securities trading’. When investing via a traditional dealing account, you’ll buy securities outright – this gives you ownership rights. You’ll only profit if you sell the securities at a higher price, but you could also receive dividend payments or interest.
When trading via CFDs, you speculate on rising and falling prices without ever owning the securities. You can make a profit if you correctly predict the direction of the market, but you’ll incur a loss if it moves against you.
Trading securities with CAPEX.com
- Low margins: Gain full exposure from 5% of the position size with our low margins
- Low trading costs: Spreads starting from 0 pips and commission zero for most of the assets
- 2,100+ securities to trade: Get exposure to a wide range of CFDs on stocks, indices, forex, commodities, bonds, or cryptocurrencies
- Negative balance protection: Ensures that traders do not lose more than the balance on their account – even if the market moves quickly or gaps.
Dealing securities with CAPEX.com
- Low dealing costs: Zero commission on shares (terms and conditions apply)
- Huge choice of securities: Invest in over 5,000+ shares and ETFs listed on 10 major exchanges
- Securities are fungible and tradable financial instruments used to raise capital in public and private markets.
- There are primarily three types of securities: equity—which provides ownership rights to holders; debt—essentially loans repaid with periodic payments; and derivatives— financial contracts whose value is dependent on an underlying asset, group of assets, or benchmark
- With CAPEX.com you can buy and sell over 5,000 securities with ownership (stocks and ETFs) or trade over 2,100 on the most popular securities in the world through CFDs.
Before you start trading securities, you should consider using the educational resources we offer like CAPEX Academy or a demo trading account. CAPEX Academy has lots of free trading courses for you to choose from, and they all tackle a different financial concept or process – like the basics of analyses – to help you to become a better trader or make more-informed investment decisions.
Our demo account is a suitable place for you to learn more about derivatives trading, and you’ll be able to get an intimate understanding of how trading and investing work – as well as what it’s like to trade with leverage – before risking real capital. For this reason, a demo account with us is a great tool for investors who are looking to make a transition to leveraged securities.
To make better-informed trading decisions, consider the following market outlooks:
- EURUSD forecast and price prediction
- Turkish Lira forecast and price prediction
- Gold forecast and price prediction
- Oil forecast and price prediction
- Dow Jones forecast and price prediction
- Natural Gas forecast and price prediction
- Silver forecast and price prediction
- British pound forecast and price prediction
- Nasdaq forecast and price prediction
What Is the Difference Between Stocks and Securities?
Stocks, or equity shares, are one type of security. Each stock share represents fractional ownership of a public corporation, which may include the right to vote for company directors or to receive a small slice of the profits. There are many other types of securities, such as bonds, derivatives, and asset-backed securities.
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.
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.
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.
What Are Treasury Securities?
Treasury securities are debt securities issued by the U.S. Treasury Department to raise money for the government. Since they are backed by the government, these bonds are considered very low-risk and highly desirable for risk-averse investors.
Are Cryptocurrencies Like Bitcoin Securities?
Again, no—the primary purpose of a cryptocurrency is to be a store of value that is decentralized and independent of a central banking system like the Federal Reserve that can be used to pay for goods and services (just like a fiat currency).
In the long term, the crypto community looks to decentralized digital currencies like Bitcoin as an eventual replacement for—or alternative to—traditional currency. Many individuals and institutions use cryptocurrencies like securities by buying, selling, and trading them speculatively for profit without any intention of spending them on goods and services.
In recent years, the SEC has also sought enforcement against issuers of cryptocurrencies and non-fungible tokens (NFTs).
Are Fiat Currencies (Like the U.S. Dollar) Securities?
Technically, no—currencies, in theory, are simply stores of value that individuals and institutions can use to pay for goods and services. In practice, however, currencies can be bought, sold, and traded strategically—much like stocks—by individuals or institutions who wish to speculate about how exchange rates may vary in the future. In other words, the primary purpose of currency is not to act as a security, but many people use it like one.