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Investment: Securities

A security is a type of transferable interest representing financial value. Traditionally securities have been categorized between debt and equity securities, and between bearer and registered securities.

The uses that are made of securities have changed over time, both for the issuer and for the holder. Though the purpose of capital raising has sometimes been taken to be a defining characteristic of securities, its uses have expanded greatly in modern times.

They are often represented by a certificate. They include shares of corporate stock or mutual funds, bonds issued by corporations or governmental agencies, stock options or other options, other derivative securities, limited partnership units, and various other formal "investment instruments." Banknotes, checks, and some bills of exchange do not fall into this category. Transferable interest in commodities like oil, food grains or metals can also be referred to as securities. One can enter into contracts to buy or sell various quantities of commodities in various commodity exchanges. These become transferable interest in the particular commodity.

Concept of "Security"
Originally the term "securities" was used to denote security interests (such as mortgages and charges) supporting the payment of a debt or other obligation. In Early modern Europe, companies and government agencies began to raise capital from the public using secured debt obligations, which came to be known as "securities". As shares became more readily transferable from the Victorian era, their functional similarity to debt securities became clearer, and both forms of investment became known as "securities". More recently, the term has also been extended to include units in investment funds and other forms of readily transferable investment.

The concept of "securities" should be distinguished from "interests in securities". The latter are the assets of a client from whom an intermediary holds securities on an unallocated basis, commingled with the interests in securities of other clients. The distinction between securities and interests in securities is often overlooked in practice, although it is a source of legal risk.

Uses of Securities for the Issuer
Issuers of securities include commercial companies, government agencies, local authorities and international and supranational organizations (such as the World Bank). Debt securities issued by government (called sovereign debt) generally carries a lower interest rate than corporate debt issued by commercial companies. Repackaged securities are usually issued by a company established for the purpose of the repackaging - called a special purpose vehicle (SPV).

New capital: Commercial enterprises have traditionally used securities as a means of raising new capital. Securities are an attractive option relative to bank loans, which tend to be relatively expensive and short term. Another disadvantage of bank loans as a source of financing is that the bank may seek a measure of control over the business of the borrower via financial covenants. Through securities, capital is provided by investors who purchase the securities. In a similar way, government will raise capital from securities (see government debt) if taxation and other income are insufficient to meet public expenditure. This will result in a budget deficit.

Repackaging: In recent decades securities have been issued to repackage existing assets. In a traditional securitization, a financial institution may wish to remove assets from its balance sheet in order to achieve regulatory capital efficiencies or to accelerate its receipt of cash flow from the original assets. Alternatively, an intermediary may wish to make a profit by acquiring financial assets and repackaging them in a way which makes them more attractive to investors.

Uses of Securities for the Holder
Investors in securities may be retail, i.e. members of the public investing other than by way of business. The greatest part in terms of volume of investment is wholesale, i.e. by financial institutions acting on their own account, or on behalf of clients. Important institutional investors include investment banks, insurance companies, pension funds and other managed funds.

Investment: The traditional economic function of the purchase of securities is investment, with the view to receiving income and/or achieving capital gain. Debt securities generally offer a higher rate of interest than bank deposits, and equities may offer the prospect of capital growth. Equity investment may also offer control of the business of the issuer. Debt holdings may also offer some measure of control to the investor if the company is a fledgling start-up or an old giant undergoing 'restructuring'. In these cases, if interest payments are missed, the creditors may take control of the company and liquidate it to recover some of their investment.

Collateral: The last decade has seen an enormous growth in the use of securities as collateral. Where A is owed a debt or other obligation by B, A may require B to deliver property rights in securities to A. These property rights enable A to satisfy its claims in the event that B becomes insolvent. Collateral arrangements are divided into two broad categories, namely security interests and outright collateral transfers. Commonly, commercial banks, investment banks and government agencies are significant collateral takers.


This article is licensed under the GNU Free Documentation License.

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