Security

What Is a Security?

A security is a financial asset that can be bought and sold, usually through an exchange or other trading venue. It is essentially a claim that gives its holder a defined right, such as a share of ownership in a company, a promise to repay borrowed money with interest, or a right tied to the price of another asset. Securities were once printed as physical certificates, but most are now recorded electronically. Because these rights can be transferred from one owner to another, securities let money move between savers and the organizations that need funding.

Main Types of Securities

Securities are generally grouped into a few broad families:

• Equity securities, such as common stock, which represent partial ownership in a company and may pay a dividend.
• Debt securities, such as bonds, which represent a promise by the borrower to repay principal and interest.
• Derivative securities, such as option contracts, whose value depends on an underlying asset.

Investment fund shares are also securities. When an investor buys shares of a pooled fund, the investor holds a security that represents a portion of many underlying holdings.

Why Securities Matter to Investors

Securities are the building blocks of most investment portfolios. Their prices change with company results, interest rates, economic conditions, and market sentiment, so their value can rise or fall, and an investor may lose some or all of the money invested. How easily a security can be sold without a large price change, known as liquidity, also varies widely between securities.

Securities are heavily regulated. In the United States, the Securities Act of 1933 and the Securities Exchange Act of 1934 form the core of federal securities law. They require issuers to disclose material information and govern how securities are offered, sold, and traded. Understanding what kind of security one holds, and what rights it carries, is a basic step in reading any investment.