What Are Securities?
The Securities and Exchange Act of 1934 defined what a security is. This long definition really boils down to just about any negotiable financial instrument, such as a stock, bond, options contract, or shares of a mutual fund is a security. Often the term “security”, or “securities”, interchangeable with the word “investment”. These are highly regulated by the United States Securities and Exchange Commission or SEC as well as every state government. This is why it is vital, whether you are investing or seeking an investment, to know what regulations apply to you and not violate those rules.
Types of Securities
Investments can come in a number of different forms. Generally they fall into one of three categories: Debt, Equity or a Hybrid.
Debt. Debt securities are probably the most common form of investment that business owners deal with. This type of investment is when money is borrowed and must be repaid. These are often memorialized by terms that establish the loan amount, interest rate and maturity or renewal date. There are many variations of debt securities including bonds, certificates of deposit, promissory notes and collateralized securities. They can have regular payments or balloon payments and also be secured by assets or guaranteed by an individual or entity.
Equity. Equity securities are ownership interest held by shareholders in a business or trust. Generally they are capital stock that is either common or preferred stock. Unlike debt securities, equity securities do not receive regular payments. They can, however, entitle the holder to receive dividends or disbursements from the business, receive voting rights in the governance of the business and profit in the capital gains when the securities are sold.
Hybrid. Hybrid securities often combine aspects of debt and equity securities. These securities allow the issuer to be creative with its offering. Some more common types of hybrid securities include convertible notes, preference shares and equity warrants.