Becoming a trader can sometimes feel like you’re taking up a second language. There is a lot of terminology in this industry, which means you should really make a point out of learning as much of it as possible whenever you can. Start today by reading about securities, it’s a very common term you’ll hear for the rest of your life as a trader.
A Basic Definition of Securities
Securities are a broad term for various financial instruments. This could refer to an option, a stock in a publicly-traded corporation and a bond from a company or government. Therefore, a security really just represents some kind of financial value. Whoever issues this security, and it could be a company or some other kind of entity, is known as the issuer.
A Closer Look at Issuers
Given their relationship to securities, you’ll want to understand what an issuer is exactly. Again, all they do is provide the security to an interested party. For instance, it could be a municipal government that is issuing bonds to help raise funds. These traders buy securities for the sole purpose of later selling them. Wholesale investors do something similar, although they usually buy and sell bonds for clients. Of course, there are also institutional investors. They include pension funds, investment banks, insurance companies, and managed funds. All of these groups are issuers and they have that name because, at some point, they issue securities, whether those are bonds or stocks.
The Two Types of Securities
There are two basic kinds of securities: debt securities and equities. The former represents capital that is borrowed and must be paid back at some point. This will mean following terms that define the principal and interest rate as well as the maturity date. Government and corporate bonds, preferred stock, certificates of deposit (CDs) and collateralized securities (CMOs and CDOs) all fall under this type of security.
Equities represent a shareholder’s ownership interest in a corporation. Stock would be a good example. Unlike debt securities, where the owner usually only receives interest plus the principal back, those who hold equity securities can also profit from capital gains.
As you can probably imagine, the SEC is in charge of regulating the public offer and sale of securities. This is one more reason you should continue learning about them as much as possible if you want to deal with securities. While there are profits to be made, you have to play by the rules.