Types of Securities – What Are They?
If you’re wondering what types of securities are out there, you’ve come to the right place! You may have come here for a few reasons. You may be looking to buy or trade securities. You may just want the definition of it to use in your research.
In which case, here you go:
Debt securities, equity securities, derivative securities and hybrid securities
Let’s take a short step back though and first answer: What are securities?
Securities are tradable financial assets. Securities are commonly referred to as any form of financial instruments. Legal definitions vary depending on jurisdiction.
In short, a security is a financial instrument that holds some type of value and represents ownership and can be traded. For example: a bond, options contract, a stock or shares of a company or shares of a fund, etc. All the examples mentioned belong to a particular class or type of security.
What Types of Securities Are There?
Overall, securities can be classed into four groups. Debt securities, equity securities, derivative securities and hybrid securities. What is the difference between them, how to buy and trade them and well, what are these securities?
Let’s take a look!
As the name implies, these securities represent debt. Debt securities are also often referred to as fixed income securities. They represent money that is being borrowed. They have interest terms and maturity date. The maturity date represents the date when the funds are due to be paid back.
Essentially debt securities are debt instruments that are tradable. Such as bonds (government or private) or certificates of deposit.
As a rule, debt instruments require the borrower to make the regular interest payments, as well as repayment of the principal amount alongside any other stipulated contractual rights. Such securities are usually issued for a fixed term, and, in the end, the issuer redeems them. Hence the term – fixed income.
Bonds can be issued by governments, private and public companies, municipalities etc.
And guess what – bonds, as well as other securities, can be tokenized. Check out our CoinMetro tokenized bond offering.
Bonds and other debt instruments usually sit between cash and stocks in terms of risk. With these types of securities rewards are stable but usually lower than stocks. Compared to cash, which loses its worth usually due to inflation it is a better option, but as always any investment vehicle comes with risks.
Similarly to debt securities, the term equity securities is quite self explanatory. Equity securities in fact represent ownership held by shareholders in a company. In other words, it is an investment in a company’s equity stock to become a shareholder of the organization.
The difference between equity securities and debt securities is that the holders of the former are not entitled to interest payments, but they can profit from capital gains by selling the stocks. The capital gains on stocks are usually higher than in bonds for example.
The regular interest payments keep the price of the bonds relatively stable. Whereas stocks prices can rise fast due to some economic news, company’s performance and other factors. It can also drop of course if things go the other way. Just as mentioned in the section about debt securities above, this is why debt is usually lower risk.
Another difference is that equity securities provide ownership rights to the holder so that they become one of the owners of the company, owning a stake proportionate to the number of the shares they’ve acquired.
Shareholders are regularly paid out dividends in the case where a company is doing well, this is not the case for debt holders.
Next up in our article about what types of securities are out there, is derivatives. So, let’s take a closer look at what derivatives are and how they work.
Derivatives are financial instruments where the value depends on basic variables. Derivatives are an instrument where a price is agreed upon. These can be assets, such as stocks, bonds, currencies, interest rates, market indices, and goods.
The main purpose of using derivatives is to try minimize risk by insuring against price movements, creating favorable conditions for speculations and getting access to hard-to-reach assets or markets. Derivatives themselves are also classed into a few different ones such as futures, forwards, swaps and options.
Also referred to as futures contracts, are contracts between parties on the delivery and purchase of an asset at a set date in the future. Hence the name, futures. Futures are traded on exchanges. In a futures transaction, the parties involved must buy or sell the asset in the contract.
Options are similar to futures. The transaction happens between two parties but the difference here is that the buyer does not have to complete the transaction and usually it is not done at a future price.
Swaps in traditional finance are swapping two assets or cashflows. For example, through an interest rate swap a trader can swap between a fixed and variable rate interest.
When it comes to crypto, an occurrence referred to as a token swap is used in different contexts. For example when a crypto project decides to move to another blockchain there would be a token swap as most blockchains are not interchangeable. On the other hand it can be referred to as trading – swapping one token to another at an agreed price.
Also, similar to futures but usually the transaction doesn’t happen on an exchange. With a forward contract, the buyer and seller must determine the terms, size, and settlement process.
There may also be higher risk to both parties in case of insolvency and the asset losing its value.
When talking about hybrid securities you can probably guess that it is a hybrid of what you’ve read about above. Hybrid securities are often used to borrow money from investors. Similarly to bonds hybrid securities may pay interest but there may also be an option of converting to equity at the end of the term if certain criteria are met.
So in a way hybrid securities can be the best of both worlds.
Hybrids can for example be preferred stocks that enable the holder to receive dividends prior to the holders of common stock, convertible bonds that can be converted into a known amount of equity stocks during the life of the bond or at maturity date, depending on the terms of the contract, etc.
Our CoinMetro bond for example is like a hybrid security. But you have a choice. You can invest and earn daily interest until maturity and redeem your investment or if you feel you want to continue reaping the rewards of CoinMetro’s success, you can convert to equity like tokens which give you the rights of shareholders.
So, now that we’ve gone through the different types of securities and given some examples, we hope you are closer to your question. If you want to know more about securities, check out these articles:
Want to hop in and try crypto trading instead? Get a free account on our crypto exchange and start building your skills.