Securities for ordinary people seem to be something inaccessible, and at the mention of an investor, an image of a colorful businessman arises before his eyes, who has been working on the stock exchange for several years and is aware of all the “chips” about the mechanisms of the market. In fact, anyone can become the owner of securities, and this acquisition will bring good income. But before you start investing, let’s take a closer look at the various financial instruments, united by the term securities.
Signs of a security
A document confirming ownership of a certain amount of money or property is called a security.
The essence of this concept is that the owner has invested his capital and has all the rights to it, which is confirmed by securities. From the standpoint of jurisprudence, it looks like a title of property rights or movable property, and from an economic point of view, it is a representative of capital.
The main signs confirming that the document belongs to securities:
- documentary – drawn up according to the established model, has the requisites;
- negotiability – are the object of purchase or sale;
- availability for purchase by individuals and legal entities;
- standard – has a standard content;
- serial production – produced in series;
- regulation and recognition by the state;
- liquidity – the ability to quickly transfer to a cash equivalent (sale);
- risk – the probability of losses.
The legislation establishes that only the state, credit organizations and legal entities can engage in the issue of securities.
The division of securities into groups is practiced according to various criteria.
If a sale and purchase transaction is made on a stock exchange, such documents should be called exchange-traded, if there is no such possibility – over-the-counter. Of course, such a classification can be called conditional, the concept is not regulated by law.
According to the form of ownership, there are registered and bearer securities. Nominal ones imply an indication of the owner’s data in the document itself or in the registration register. The bearer paper belongs to the person who has it at the moment and does not require identification of the owner.
Moreover, if investor acquired a document issued by a Russian company, it has the status of a national one. And, accordingly, foreign is a security of another state.
By appointment, you can select:
- Equity – give the right to influence the fate of the issuer, in accordance with the size of the acquired share;
- Debt – documents according to which the issuer is obliged to repay the par value upon the expiration of the date of their circulation.
There are paper and electronic documents. Currently, trades in shares and bonds on the stock exchange are carried out in non-documentary (electronic) form by concluding transactions for the sale or purchase of securities.
Types and their functions
After we got acquainted with the basic concept of securities, let’s find out in more detail how they differ, what profitability they can bring and what risks they have.
This type of equity securities gives the right to receive dividends and own part of the company.
Shares are ordinary, becoming the owner of which the investor can participate in shareholders’ meetings and influence important decisions. Another type of securities – preferred (preferred shares), a shareholder will not be able to take part in the management of the company, but he also has the right to a part of the company’s property if it becomes bankrupt. As a rule, the cost of such shares is lower than usual.
Shareholders receive passive income two ways:
- The growth of the share price, which is influenced by positive news about the company, the improvement of its performance In this case, the profit will be obtained by selling the stock at a better price.
- Shareholders are entitled to dividend payments when the organization is doing well. Holders of ordinary shares are entitled to a portion of the company’s profits, the amount of which the organization decides. Preferred owners are assigned a fixed payment.
Shares can be bought one at a time or in a lot, which can contain 10 pieces or even 10 thousand securities. The main risk when investing in stocks is the likelihood of a decline in quotations, which are sensitive to any negative news.
Perhaps one of the most reliable securities in terms of minimizing risks is bonds…
Issuing them is a way to borrow from depositors. The organization borrows money and undertakes to return it at the maturity date, which is indicated in advance when issuing debt securities. The most common practice is to issue bonds for 1-3 or 10 years. In addition, there are also indefinite ones.
As long as the bond remains with the owner, he is entitled to interest payments (coupon yield). If necessary, the security can be sold ahead of schedule, and make money on the difference between buying and selling. If a perpetual bond is in possession, the investor receives income as long as it is owned by him.
A debt security can be:
- corporate – issued by a private company;
- state – the guarantor of which is the state;
- municipal – issuer: local authorities.
The most reliable is considered to be OFZ – a federal loan bond issued by the Russian Ministry of Finance. In addition, securities are issued in foreign currency – Eurobonds. Most often these are dollars and euros, but there are also yuan, Swiss francs and others.
For those who want to purchase shares of private foreign companies, while remaining within the legal framework of their state, the issuance of depositary receipts is provided.
These are securities that are issued by a bank providing depository services, having previously purchased shares from foreign corporations. The investor purchases a depositary receipt, which, in fact, is an indirect purchase of foreign securities.
Actions with depositary receipts are performed on the national stock market, as well as on foreign exchanges where the bank is present. The weight of a security of this rank is determined by the number of shares for which it is issued. The main purpose of issuing a depositary receipt is additional financing from foreign investors and increasing the liquidity of securities.
- GDR (Russian) – this receipt implies the national origin of the issuer and the depositary bank;
- ADR (American) – a security of the Bank of America, issued in dollars, rarely in euros;
- GDR (global) – applicable for securities issued by a bank located in any other country.
Savings certificates are used to preserve and increase free finances. These are securities confirming a cash deposit for a certain period, which cannot be extended. In addition, it is also impossible to deposit additional funds.
A savings certificate is issued to the bearer. This means that the amount of the deposit and the accrued interest will be able to the one who provides the security to the credit institution. It should be noted that only banks are engaged in issuing certificates with the permission of the Central Bank of Russia.
One of the types of trust management of funds is the acquisition of a part in a mutual fund.
This is regulated by a security called an investment share, which must indicate the name of the buyer.
The acquisition of such a document guarantees competent money management and reimbursement of funds if the investor decides to terminate cooperation with the mutual fund.
When joining an open-ended fund, the shareholder can at any time demand payment of compensation for a security commensurate with his part of the mutual fund’s property fund. A closed-end investment fund gives the shareholder the same rights, but the withdrawal and receipt of cash payments are possible after the termination of the existence of such a mutual fund.
A bill of exchange is a security that confirms that the person who issued the bill is in debt to the holder of the security. In fact, this is a form of lending, as a result of which the debtor must make payment within a predetermined period.
A bill of exchange, as a financial instrument, performs certain functions:
- the option of obtaining a loan, with the help of a security you can pay for a product or a loan, repay a loan;
- used as collateral for transactions;
- is used to speed up cash settlements.
A check is a security, with the help of which the drawer gives an order to the bank, of which he is a client, to issue the amount indicated in it to the bearer of the check. Checks are of several types:
- cash – to receive cash;
- settlement – to pay by bank transfer;
- registered – with the identification of the owner;
- presentation – issued to the person who presents it;
- order – when filling out, a specific person is indicated.
Banks keep a strict record of checks. The owner is issued a book with securities (checks) containing data about the bank and its client.
This is a security with an indication of the owner’s data, which is drawn up when concluding a banking transaction, most often for the purchase of housing on a mortgage. A mortgage denotes the right of its owner (bank) to repay the debt, as well as to a mortgage in the form of a purchased apartment or house, for the purchase of which mortgage funds were issued. For the duration of the agreement, the mortgage is kept by the lender (in the bank), and after the payment of the debt is transferred to the other party, which has fulfilled its debt obligations in full.
When buying securities, an investor should be aware of the likely risks. This is necessary for the ability to prevent and minimize losses.
All risks can be divided into 2 large groups:
Systemic risks are formed depending on the political and economic situation in the country in which the issue of securities is carried out:
- high inflation risk;
- drastic changes in government or state legislation;
- the likelihood of internal and external military conflicts.
To anticipate non-systemic risks, it is necessary to first analyze the activities and position of the issuer on the market:
- depreciation of a security due to bankruptcy;
- there is a risk of a decrease in interest payments, which is associated with a change in the interest rate;
- credit risk is associated with the inability of the issuer to pay off debt obligations;
- the risk of a wrong choice for investment.
Pros and cons
For an investor, buying securities has a number of advantages:
- Preservation and augmentation of funds. With the help of stocks, bonds, depositary receipts, shares, you can not only protect free assets from inflation, but also receive interest payments (dividends or coupons).
- Investing in mutual funds means entrusting capital to professionals who know where to send money so that they “work”.
- Securities are widely available. Anyone can buy them if they wish. Moreover, their cost is low.
- Many of them have excellent liquidity and, if necessary, can be easily converted into cash.
The disadvantages of securities include:
- Many of the securities are not a guarantee of income. Shares, bonds may fall in price, there is a risk of bankruptcy of the issuer.
- Low profitability turns off many depositors. Those who want to reap significant benefits will have to take great risks. But due to financial ignorance, many inexperienced investors lose their money.
- Obtaining a stable income when investing in securities is a long-term perspective.
I think that now that you have an idea of what securities are, this knowledge will definitely be useful to you in the future. If you wish, you can become an investor today and take care of the well-being of tomorrow. If you invest your money correctly, you can have a stable profit.
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