Security

Reviewed by Sweta | Updated on Aug 26, 2020

Introduction

Security is a financial instrument denoting various financial assets. It is denoted by fixed face value and held in the demat form.

Understanding Security

Securities carry a monetary value. The broad categories of securities include equity, debt and hybrid securities. Corporations raise money from through public and private means from the sale of securities. Equity represents an ownership interest in a public enterprise.

A public issue can comprise of equity issue through Initial Public Offering (IPO), further issue of capital or issue of any other securities.

Factors to Consider

  1. Equity securities do not carry a fixed rate of return. Equity shareholders are, however, entitled to a dividend as and when paid by the company. Equity shareholders can benefit from capital gains on the sale of equity shares.
  2. Equity shares also carry voting rights. Equity shareholders, being owners of the corporation, are entitled to vote based on the number of equity shares held by them.
  3. In the case of winding up of the corporation or closure of the company due to bankruptcy, etc., the equity shareholders will receive only the residual amount after all the payment of all the creditor’s dues. The equity holders may also be offered payment in kind.
  4. Debt securities, such as debentures or bonds, and hybrid securities such as preference shares carry a fixed rate of return.
  5. Debt securities are issued in return to monies borrowed. The securities are for a fixed tenure; they carry an interest rate and a maturity or renewal date.
  6. Debt securities may be secured (using collateral) or unsecured
  7. Hybrid securities combine features of equity and debt.
  8. Most types of securities are listed and traded on the stock exchange.
  9. Debt securities and hybrid securities are redeemed at par. However, holders of equity securities are paid at the end after the payment of all creditors.
  10. Example of hybrid securities includes equity warrants (equity options given to shareholders to purchase stock), convertible bonds (bonds that can be converted into shares).