Both stocks and bonds are securities. Learn about these securities and understand the difference between equity securities and debt securities.
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Key points to remember
- Equity securities are financial assets that represent shares of a company
- Debt securities are financial assets that define the terms of a loan between an issuer and an investor
- Fixed income investments include securities such as corporate and government bonds, but also certificates of deposit, which are generally not securities.
Whether the bulk of your portfolio is in stocks or fixed income, most of us are familiar with the most common terms describing traditional investment securities: stocks, bonds, exchange traded funds (ETFs). , mutual funds, etc. But sometimes specialized terms can leave the average investor confused or unsure.
For example, most investors probably know that stocks are also called actions. And an equity is a type of security. But not all investors may know the difference between a fixed income security and a stock. When it comes to bonds, most investors are probably familiar with the terms debt securities and fixed income securities. But maybe you are not entirely familiar with the specific characteristics that define and differentiate the two.
To add more confusion to the mix, the word Security may also vary in legal definition from country to country.
So, in case you are still wondering about the definition of securities in general versus stocks and bonds, let’s define some of the more common types of securities (according to US definitions).
What Are Securities In Investing?
Securities are generally considered to be negotiable financial assets. Although this is an oversimplification, “illiquid” securities that do not trade are not attractive or suitable for the vast majority of investors. Most securities are issued by institutions (usually corporations and governments) for the purpose of raising capital. Therefore, almost all securities are considered forms of investment.
Because investment securities cover a wide range of assets, they are divided into broad categories, two of which will be our main focus:
- Equity securities (for example, ordinary shares)
- Fixed income investments, including debt securities such as bonds, notes and money market instruments (some fixed income investments, such as certificates of deposit, may not be securities at all)
What are equity securities?
Equity securities are financial assets that represent shares of a company. The most common type of equity security is common stock. And the characteristic that most defines an equity security — which sets it apart from most other types of securities — is ownership.
If you own an equity security, your shares represent part of the ownership of the issuing company. In other words, you are entitled to a percentage of the profits and assets of the issuing company. If you own 1% of the total shares or security shares issued by a company, your stake in the controlling company is equal to 1%.
Other assets, such as mutual funds or exchange-traded funds, may be considered equity securities as long as their holdings consist of aggregated equity securities.
What are debt securities?
Debt securities are financial assets that define the terms of a loan between an issuer (the borrower) and an investor (the lender). The terms of a debt instrument typically include the amount of principal to be repaid when the loan matures, interest rate payments, and the maturity or renewal date.
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The most common debt securities are bonds, for example corporate bonds and government bonds, but also include other assets such as money market instruments, banknotes and commercial paper.
When you buy a bond from an issuer, you are essentially lending money to the issuer. Most of them In some cases, you may be loaning money to receive interest on the money loaned. (Some debt securities, such as exchange-traded notes, are used as a proxy for other negotiable instruments.) And at maturity, you expect to receive the full face amount of your money.
Caveat: Debt securities also involve risks, including price risk and credit risk, depending on the type of instrument and the issuer. Changes in interest rates can create price risk. Credit risk is the possibility that the borrower will not repay the debt when due.
What are Fixed Income Investments?
Fixed income investments include debt securities that provide returns in the form of periodic and “fixed” interest payments to the investor. The most common type of fixed income investments are also securities, such as corporate bonds and government bonds.
Not all debt investments have a literally fixed payout. Some, in fact, have no payment at all, but instead incorporate the effect of interest into the sale price up front. Other examples include certain variable income securities such as floating rate notes and floating rate demand bonds.
Other forms of debt securities include treasury bills (T-bills) and treasury bills (T-notes).
Summary of titles
- Equity securities are financial assets that represent shares of a company.
- Debt securities are financial assets that define the terms of a loan between an issuer (borrower) and an investor (lender).
- Fixed income investments are investments focused on interest income, including debt securities and certificates of deposit.