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Securities

Securities

Security

In the investing world, Securities are financial instruments that hold value and can be traded between parties. Stocks, bonds, mutual funds, ETFs, etc are all different types of securities. Also, your assets like home, car, gold, etc cannot be classified as a security.

Equity securities generally refer to stocks. Debt securities, also called fixed-income securities, generally refer to bonds.

Types of Securities

Stock

Stocks represent partial ownership (or equity) in a company. When you buy stock, you’re actually purchasing a tiny slice of the company — one or more "shares".

You buy a share because you believe that the company's value will go over time, and so will your investment in it's shares. Performance of such investment is directly tied to the valuation of the company.

Stocks are also known as corporate stock, common stock, corporate shares, equity shares and equity securities. Companies may issue shares to the public for several reasons, but the most common is to raise cash that can be used to fuel future growth.

Bonds

Bonds are a loan from you to a company or government. There’s no equity involved, nor any shares to buy. Put simply, a company or government is in debt to you when you buy a bond, and it will pay you interest on the loan for a set period, after which it will pay back the full amount you bought the bond for. But bonds aren’t completely risk-free. If the company goes bankrupt during the bond period, you’ll stop receiving interest payments and may not get back your full principal.

With bonds, you usually know exactly what you’re signing up for, and the regular interest payments can be used as a source of predictable fixed income over long periods.

The durations of bonds depend on the type you buy, but commonly range from a few days to 30 years. Likewise, the interest rate — known as yield — will vary depending on the type and duration of the bond.

Bonds generate cash through regular interest payments. The distribution frequency can vary, but it’s generally as follows:

  • Treasury bonds and notes: Every six months until maturity.
  • Treasury bills: Only upon maturity.
  • Corporate bonds: Semiannually, quarterly, monthly or at maturity.

Mutual Funds

Mutual funds let you pool your money with other investors to "mutually" buy stocks, bonds, and other investments. They're run by professional money managers who decide which securities to buy (stocks, bonds, etc.) and when to sell them. You get exposure to all the investments in the fund and any income they generate.

ETFs

Like mutual funds, Exchange-Traded Funds offer investors a way to pool their money in a fund that makes investments in stocks, bonds, or other assets and, in return, to receive an interest in that investment pool. Unlike mutual funds, however, ETF shares are traded on a national stock exchange and at market prices that may or may not be the same as the net asset value (“NAV”) of the shares, that is, the value of the ETF’s assets minus its liabilities divided by the number of shares outstanding.

Security Broker

You can't just walk to a company and ask for a share in exchange for money. And you can't either loan them money in exchange for interest over time. Financial institutions have established a system to handle these transactions, and they are done through an entity called a broker.

There are a variety of types of brokerages, that lets you purchase a variety of investment options, however they vary in the way you can use them.

A Standard Brokerage has access to a variety of investments option to purchase, with no limits on the purchase.

Individual Retirement Account (IRA) are also a type of brokerage that lets you purchase a variety of investment options, however the funds managed by these brokerages grow in a tax-advanted account that can be used in retirement.

529 Education Savings is another brokerage that lets you purchase a variety of investment options, however the funds managed (being tax-advantaged) can only be used for educational purposes. Section 529 plans are tax-qualified college saving or prepaid tuition programs generally offered and administered by the states. Created as tax-advantaged savings vehicles, they were designed to encourage families to save for future college education expenses.

At some point, only standard brokerages existed. The government enabled brokerages like IRA, 529, and HSA to encourage people to save and grow their money either tax-free or tax-deferred way, but for critical purposes like retirement, education and health.

History

In 1602, the Amsterdam Stock Exchange (now Euronext Amsterdam) became the first official stock market with trading in shares of the Dutch East India Company, the first company to issue stock. On May 17, 1792, the New York Stock Exchange opened under a platanus occidentalis (buttonwood tree) in New York City, as 24 stockbrokers signed the Buttonwood Agreement, agreeing to trade five securities under that buttonwood tree.

IRAs were started in the year 1974. The Employee Retirement Income Security Act (ERISA) created individual retirement accounts (IRAs). Congress designed traditional IRAs originally to have two roles: first, to give individuals not covered by retirement plans at work a tax-advantaged savings plan, and second, to play a complementary role to the employer-sponsored retirement system by preserving rollover assets at job change or retirement.

The first prepaid college savings vehicle was created in 1986 by the state of Michigan. In 1994, the U.S. Court of Appeals for the Sixth Circuit ruled that the income from the plan should not be subject to the federal income tax.

HSAs were established as part of the Medicare Prescription Drug, Improvement, and Modernization Act, which included the enactment of Internal Revenue Code section 223, effective for tax years beginning after December 31, 2003, signed into law by President George W. Bush on December 8, 2003.

Resources

Last update: May 2, 2024