What are securities in finance? Securities are assets that have a value determined by any number of influencing factors. Investors buy and sell securities with the goal of earning profits if the value of the asset increases.
Securities don’t have inherent value, but they have worth in the rights they provide, such as rights to assets or voting rights. Factors like the issuer’s financial condition, the broader market conditions, and the regulatory environment all can play a role in the value of a security.1
To be considered a security, an investment must meet four key criteria. First, it must entail an investment of money. It must be an investment made to a “common enterprise,” or when profits depend on a third party, and investors must expect to earn a profit from it. And, finally, it must involve a third party to promote it.2
Assets like gold, jewelry, art, life insurance and annuities are not considered securities.
Which Types of Investments Are Securities?
Securities are generally one of three main types – equity, debt, or hybrid. Let’s go over each type in more detail:
- Equity securities: Equities, such as stocks, provide an ownership stake in an entity like a company, trust or partnership. If you hold equities, you may receive regular payments like dividends, but you are not entitled to them. Instead, you can earn profit from capital gains when you sell the equities if their value has increased. Equities often include voting rights.
- Debt securities: Debt securities, like bonds, CDs or notes, are essentially loans that are repaid with interest to the holder. If you hold debt securities, you will typically be entitled to regular repayment of the debt along with interest for a fixed period of time. Debt securities typically do not include voting rights.
- Hybrid securities: Hybrid securities, like equity warrants or convertible bonds, have features of both equity and debt securities.
Within these three categories, securities can take one of many forms including stocks, bonds, CDs, notes, certificates of interest, collateral trust certificates, investment contracts, or interest in gas or oil. They can also include derivative securities such as call or put options, in which their value is based on an underlying asset, or asset-backed securities like loans or mortgages, and more.3
How to Buy and Sell Securities
Securities can trade in several ways, but there are two principal transactions – issuer transactions and trading transactions. With issuer transactions, a business raises capital by selling securities to investors. With trading transactions, investors buy and sell outstanding securities.4
Outstanding securities often trade over exchanges that help provide liquidity and a regulated market. To buy and sell over an exchange, you need an account at a brokerage firm or a broker-dealer. Securities can also trade “over-the-counter,” which is through a broker-dealer network instead of a centralized exchange. In some cases, you can purchase stock directly from a company.5,6
How Securities Are Regulated
Securities were once regulated at the state-level in the U.S., but that changed with the Securities Act of 1933, which provided federal regulation for the stock market.7
Securities are now regulated by the U.S. Securities Exchange Commission (SEC), but states and other organizations may also play a role. For example, the National Futures Association (NFA) and the Financial Industry Regulatory Authority (FINRA) also regulate securities. These agencies aim to reduce fraud by creating and enforcing regulations designed to reduce market manipulation.8
Under the law, companies selling investment contracts must provide certain published information on the offering and the company along with key figures in the company. And they are liable for any misinformation they publish. The goal is to ensure that investors receive accurate information so they can make informed decisions about which assets to buy and sell.
The Bottom Line
Securities are a common type of financial instrument. They allow investors to potentially earn profits toward their financial goals, such as saving for retirement. For issuers, securities provide a way to raise capital to use for any number of reasons such as investing in research and development or expanding into new markets.
As with any investment securities do carry risks, including the potential for financial losses. Consider consulting a financial advisor for guidance on which types of securities may be a good match for your investing goals.
Have Questions About Investing?
Talk to a qualified financial advisor today to get professional advice today. Need help finding a financial advisor in your area? Give us a call today so we can match you with an advisor who will put your needs first.
—
1 Cornell Law School Legal Information Institute, “Securities,” https://www.law.cornell.edu/wex/securities
2 U.S. Securities & Exchange Commission, “Framwork for ‘Investment Contract’ Analysis of Digital Assets,” https://www.sec.gov/corpfin/framework-investment-contract-analysis-digital-assets
3 Federal Deposit Insurance Corporation, “FDIC Laws, Regulations, Related Acts,” https://www.fdic.gov/regulations/laws/rules/8000-6200.html
4 Cornell Law School Legal Information Institute, “Securities,” https://www.law.cornell.edu/wex/securities
5 FINRA, “Buying and Selling Stocks,” https://www.finra.org/investors/learn-to-invest/types-investments/stocks/buying-and-selling-stocks
6 Investor.gov, “Over-the-Counter (OTC) Securities,” https://www.investor.gov/introduction-investing/investing-basics/glossary/over-counter-otc-securities
7 Cornell Law School Legal Information Institute, “Securities Act of 1933,” https://www.law.cornell.edu/wex/securities_act_of_1933
8 U.S. Securities & Exchange Commission, “What We Do,” https://www.sec.gov/about/what-we-do
—
Options are not suitable for all investors.
All investing involves risk, including the possible loss of principal. There is no assurance that any investment strategy will be successful.
The views depicted in this material are for information purposes only and are not necessarily those of Cetera Advisor Networks LLC. They should not be considered specific advice or recommendations for any individual.
