Back in the days before the electronic era, when one made an investment, they were issued with a paper certificate or a note of some sort. It is these paper certificates or notes that did serve as documentation for the investment that the investors had made in the particular venture and as well they did outline the terms of the investment. The paper certificates were as well known as securities and they were the proof one had for their investments. By the way, these paper securities could just be sold and bought in the same way that we it happen in the sale and purchase, trading, of the shares, bonds and stocks of the many mutual funds we have today.
Fast forward to this day and we have the term “securities”. By and large, today when we talk of securities, we see this term being used in reference to any other form of a negotiable financial instrument, be it stocks, bonds, the options contract or shares of a mutual fund. To bring it into context and for clarity, it may be good thinking of the word “security” to be interchangeable with “investment” and the “securities market” to be interchangeable with “capital market” or “the market”. Looking at securities, these generally fall into three main groups. The main and broad categories into which securities fall into are such as; the debt securities, the equity securities and the derivative securities.
Debt securities are as well referred to as the bonds. Oftentimes, business have to borrow money for their needs to grow and expand operations and these in most cases come through the traditional banks lending schemes. Considering the element of risk that the banks have to deal with, they may not be able to lend as much to a business and as such will only lend to some limit in most cases. As a result of this, a business will have to go to the capital markets and there issue a debt security known as a bond. When as an investor you buy a bond, you are essentially lending money to a company and this company owes the much you lent them back to you. The company as well must pay you the interest on the amount of the bond and this is what you earn as proceeds from the investment.
Then, there are the equity securities which are as well known as “stocks”. Equity securities or stocks come in where a business seeks funding for the growth and expansion projects by bringing on board additional investors, who may be private investors or where they go to the capital markets and issue securities in the form of publicly traded shares or stocks.