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
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
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
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
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