FINANCIAL SECURITIES-An overview

INTRODUCTION

Securities are  financial instruments that represent an ownership position in a publicly traded company (stock), a creditor relationship with a government body or a corporation (bond), or rights to ownership as represented by an option. A security is a negotiable financial instrument that represents some vale. To be simple, security is a tradable financial asset of any kind. The company or any other entity issuing the security is called ‘issuer’. Interests of investors in securities are generally safeguarded by a self regulatory authority like Securities and Exchange Board of India (SEBI) in India and Securities Exchange Commission in United States. Securities can be broadly classified into three types. They are

1. Debt Security
2. Equity Security
3. Derivative Security

DEBT SECURITIES: A debt security represents that type of money that is borrowed which is to be repaid with terms that define the money that is borrowed, interest rate and maturity period.  Debt securities also known as fixed-income securities include money market securities and capital market debt securities such as government and corporate bonds, certificates of deposit and collateralized securities. Money market securities usually have maturity periods of less than one year.

EQUITY SECURITIES: Equity security represents ownership share of an individual in a company such as a stock. Unlike debt securities, which require regular payouts (interests) to the holder, equity securities are not entitled to any payment, instead equity security holders get profit from capital gains and dividend payouts. However, equity generally entitles the holder to a pro rata portion of control of the company which means that a holder of a majority of the equity is usually entitled to control the issuer.

DERIVATIVE SECURITIES: Derivative is basically a financial instrument which derives its value from the value of an underlying security. Examples of derivatives are:

Options: An asset or a security sold by one party to other giving the holder the right , but not the obligation, to buy or sell the security under consideration at the striking price.

Future contracts: This is a financial contract which obligates the buyer to purchase the asset under consideration at a future date.

Forwarded contracts: This is a cash market transaction where in the delivery of the asset under consideration is deferred until a future date.

Swaps: Exchange of one currency, security or interest rate for other.

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