If you're getting into investing, you might have come across the term financial securities. Financial securities, or securities, are tradeable assets that hold value. They're intangible investments that can be traded between two parties.
Multiple types of financial securities exist, including stocks, bonds and derivatives. Each type has its role in helping investors diversify their portfolios, manage risk and grow their income.
Learn more about what financial securities are in finance, their role in the global economy and markets, and their importance for individual investors.
Even if you're new to investing, you probably know something about stocks, bonds, mutual funds, exchange-traded funds (ETFs) and the like. These are all types of financial securities.
Not all investments are financial securities. For example, currency, interest from a savings account and insurance policies are not considered securities. Tangible assets like a vehicle or property are also not securities.
Financial securities are investment instruments that hold value and can be traded. In finance, securities can be highly risky but with great return potential. Or they can be low-risk with minimal returns.
Take stocks for example. If you buy a stock from a start-up pharmaceutical company, you're looking at a potentially high-risk, high-return financial security.
Mutual funds and certificates of deposit are also financial securities. The returns may not be as high, but the risk is usually much lower than picking individual stocks.
The main types of financial securities are:
There are also asset-backed financial securities. These are backed by assets that generate income. Home equity loans and leases are two such examples.
Another type of security is the hybrid security. These combine key aspects of equity and debt securities. Examples include convertible bonds, preference shares and equity warrants.
Securities in finance can be complicated, so here's a breakdown of three of the most common types.
What sets equity securities apart is that they give the investor ownership. Take stocks for example.
When you purchase company shares, you're essentially receiving a small ownership percentage in that company. If you purchase 2% of all company shares, you own the equivalent of 2% of the controlling company.
Mutual funds and ETFs may also count as equity securities, but only if they primarily consist of pooled equity securities.
When you invest in equity securities -- like stocks -- you may gain voting rights in that company. Your actual rights, and the issues you can vote on, depend on the company and your ownership percentage.
The stock's performance can also fluctuate wildly due to the company's decisions, economic factors and global events. You could theoretically see great returns, but the risk may be high.
Debt securities, like bonds, are a type of fixed-income security. When you purchase a bond, you're essentially lending money to the bond issuer -- often a government or corporation. In exchange, you receive a set interest rate over the life of the bond. Once the bond matures, you also get the initial investment back.
There are many types of bonds, including corporate bonds (like high-yield bonds), municipal bonds (like revenue bonds) and U.S. Treasuries (like long-term securities).
Bonds usually offer predictable returns. They may also be less risky than stocks, but they're not entirely risk-free.
For example, bonds can still be subject to inflation or fluctuating interest rates. Selling a bond before it matures could lower its value. The issuer could also default on the bond.
A derivative is a financial security in which its performance is based on the underlying asset's or security's performance. Common types of derivatives include:
Stock options, for instance, are a type of derivative because their values change based on the underlying stock's price movements. Futures are also a type of derivate, one in which the contract agreement specifies when to buy or sell a specific commodity or instrument -- and at what price.
Some investors use derivatives for hedging and speculation:
If you're thinking about investing in securities, know that you have options. Here's how to invest in stocks and bonds, and how to balance the risks and rewards.
You can purchase or sell stocks through one of the following:
You can't purchase or sell bonds on a public exchange. Most can be traded over the counter (or through a broker). If you're looking for a U.S. Treasury bond, you can get it from the government.
Any investment comes with a certain level of risk. You can find ways to manage this risk yourself, or you can work with a professional advisor. Either way, be sure to weigh the options before committing your money to any specific financial security.
These are some of the biggest risks to consider when investing in financial securities:
Some ways to mitigate risk include:
Thinking about diversifying your portfolio? Check out these other common types of securities.
Mutual funds pool money from investors to buy a variety of stocks, bonds and other securities. They offer diversification and professional management. They're often lower-cost than other investment options. Investors can also redeem their shares -- also known as liquidation -- at any time.
Exchange-traded funds are similar to mutual funds. However, they're traded on national stock exchanges at market prices. Two common types include index-based ETFs and actively managed ETFs.
ETFs offer a low-cost way to diversify your portfolio. They're also highly liquid, a plus for those who need quick access to their funds.
Treasury bills, or Treasury securities, are a short-term government debt security. They're a low-risk option for more conservative investors since they're backed by the U.S. government.
This is a type of financial security, like a bond or preferred stock, that can be converted into company shares. Convertible securities offer the potential for growth in addition to regular income.
Real estate investment trusts let investors invest in real estate (and sometimes related assets) without having to own and manage property. REITs generally include commercial real estate, like hotels, office buildings, self-storage facilities and warehouses.
REITs can generate income for investors. However, they lack liquidity.
Financial securities allow investors to turn a profit, diversify and potentially balance risk.
Owning a variety of securities can help with portfolio diversification.
For example, say you own both stocks and bonds. Stocks can be highly volatile, but may have high returns. Bonds tend to pose a much smaller risk, but usually have lower returns. Having a balance of both can diversify your assets while managing risk.
Each type of financial security has its own income and growth potential. You can purchase multiple securities -- like dividend-earning stocks and interest-bearing bonds -- to grow your income.
Consider your risk tolerance and your financial goals when determining which types of securities to invest in.