When you step into the world of finance, there may be plenty of words you don’t readily understand. Many words have different definitions in the finance world than they do otherwise. One of these words is security. We all know what security means outside the finance world, but in the finance world, it means something different.
What are securities in finance?
In finance, the word security refers to a fungible, negotiable financial instrument that can hold monetary value. It can be broadly categorized into two different types. There are equities and debts. Of course, some hybrid securities combine both of these elements.
Equity security is representative of interest held by shareholders in an entity. This equity is in the form of shares of capital stock, including shares of common and preferred stock. People who hold equity security are usually not entitled to regular payments, but they can profit from capital gains when they sell the security if it increases in value.
Debt security represents money that must be repaid, and the security will confirm the size of the loan, the interest rate, and the renewal dates. Debt securities can include government and corporate bonds, certificates of deposit, and collateralized securities. They entitle the holder to regular payments of interest and repayment of principal. They are usually issued for a fixed term that the issuer can redeem at the end.
A few hybrid securities have the characteristics of debt and equity security. They include equity warrants, convertible bonds, and preference shares.
Security refers to a fungible, negotiable financial instrument that can hold monetary value, and it can be broken into two major types. Equity security is interest in an entity, and debt security is money that must be repaid. While they are not tangible in the same way jewelry or a car is, they can be sold and traded and are divided into marketable and unmarketable.