What are the three types of securities?
What are marketable and non-marketable securities?
How can I invest in securities?
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What Are Securities?
Securities are tradable financial instruments that represent many of the assets bought and sold in financial markets. They play a central role in investing by allowing individuals and institutions to exchange money for assets that can store value, generate income through dividends or interest, or potentially increase in price over time. Common examples of securities include stocks, bonds, and exchange-traded funds (ETFs), which fall under the broader category of fungible financial instruments.
Typically, securities are issued by entities such as governments or companies when they need to raise capital. By issuing these instruments, they can obtain funding from investors who purchase them.
Once issued, securities can be bought, held, or traded by investors in financial markets. There are several ways these instruments can be structured, issued, and exchanged. To understand them better, it is helpful to first examine the different types of securities available to investors.
Securities
What are the three types of securities?
Securities are divided into three categories: equity, debt and derivative securities. Below is a table explaining the differences.
| Debt | Equity | Derivatives | |
| Example of an asset class | bonds | stocks | options, futures |
| Normal returns | fixed cash flow | dividends | derived from an underlying asset |
Debt Securities
Debt securities are essentially loans issued by governments or companies to raise capital. When an investor purchases a bond, they are lending money to the issuer.
In return, the issuer agrees to pay interest at either a fixed or variable rate, and to repay the original amount invested (the principal) when the bond reaches maturity. Because of their predictable interest payments, these instruments are commonly referred to as fixed-income securities.
Common types of debt securities include:
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Corporate bonds
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Government bonds
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Treasury bills
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Certificates of deposit (CDs)
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Asset-backed securities (ABS)
Compared with stocks, the potential profit from bonds is usually more limited. However, bondholders generally have greater protection in the event of bankruptcy, since creditors are typically paid before shareholders.
Collateral and Debt
Some forms of debt are backed by collateral, which is an asset pledged to secure the loan. A mortgage is a good example.
When someone takes out a mortgage, there are typically two forms of collateral involved:
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The down payment made when purchasing the property
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The property itself
If the borrower fails to repay the loan, the lender can claim the collateral. In the case of a mortgage, this usually means losing both the property and the initial payment.
Corporate and government bonds are among the most widely traded debt securities, though many other bond types also exist.
Equity Securities
Equity securities typically refer to shares of stock issued by companies. Owning stock means owning a portion of the company that issued it.
Companies issue shares as part of their capital stock, which generally comes in two main forms:
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Common stock
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Preferred stock
Shareholders may receive several rights, including:
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Voting on company decisions
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Receiving dividends if the company distributes profits
Not all profitable companies pay dividends. Many choose to reinvest earnings into growth and expansion instead.
The value of a stock depends largely on the company’s financial performance and market sentiment, which reflects how investors perceive the company’s future prospects.
Derivative Securities
Derivatives are financial contracts whose value is derived from another underlying asset, such as commodities, currencies, stocks, or indexes.
Originally, derivatives were mainly used for risk management and hedging, helping businesses protect themselves from price fluctuations. Today they are also widely used for speculation.
The most common types of derivatives include:
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Options
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Futures
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Swaps
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Forwards
Options
Options allow investors to buy or sell an asset at a predetermined price before a certain date.
For example, imagine a stock currently trading at $50. An investor who believes the price will rise could purchase a call option instead of buying the stock directly.
Suppose the option allows the investor to buy 100 shares at $50 before a certain expiration date. To obtain this contract, the investor pays a premium of $1 per share.
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If the stock rises to $60, the investor could gain $10 per share, or $1,000 total.
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After subtracting the $100 premium, the profit would be $900.
If the price falls instead, the investor can simply let the option expire, losing only the $100 premium rather than the much larger loss that could occur if the shares had been purchased outright.
Futures
Futures contracts involve an agreement to buy or sell an asset at a specific price on a future date.
For instance, a gold mining company may want to protect itself against falling gold prices. To do this, it could sell a futures contract that locks in the price at which it will sell gold in the future.
On the other side of the trade may be an investor who believes gold prices will increase and wants to profit from that expectation.
The pricing of futures contracts depends on several factors, including:
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Storage costs
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Time until contract expiration
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Market expectations about future prices
In general, derivatives are complex financial instruments and are usually better suited for experienced investors rather than beginners.
Securities
What are marketable and non-marketable securities?
Marketable securities are sold on the open market, while non-marketable equity remains in individual ownership. It might be a bit confusing, so let’s take a look at a hypothetical situation.
Marketable and non-marketable securities are mainly differentiated in how liquid they are. What does liquid mean in financial terms? It denotes how easily an asset can be sold. Stocks in major companies like Apple and Amazon are very liquid as there is demand for them in the market. However, equity in a private company is restricted from sale.
Below is a chart explaining the differences between marketable and non-marketable securities.
|
Marketable |
Non-marketable |
|
|
Liquidity |
High liquidity |
Secondary market |
|
Secondary market availability |
Available |
Not available |
|
Transferring ownership |
Public companies |
Private Companies |
You might be wondering what the differnece is between the secondary and the primary market. The names are rather counterintuitive as the primary market is not where most of the trading takes place. The primary market is where initial public offerings (IPOs) happen. This is when the company first sells its shares. If you would like to learn more about this read our article on investing in an IPO. The secondary market is where assets are traded after the initial sale and this is what most people refer to as the stock market.
Securities
How can I invest in securities?
How Beginners Can Start Investing in Securities
For most beginners, buying and selling securities is the most common way to begin investing. Traditional debt and equity instruments, such as bonds and stocks, are among the most widely used investment options.
To invest in securities, you will need a brokerage account. However, before choosing a broker, there are several important steps you should consider. The first and most important one is creating a clear investment plan. Below are a few key elements that should be part of that plan.
Define Your Financial Situation and Goals
Start by evaluating your current financial position. Are you a student with limited income? Are you planning for retirement? Or perhaps saving money for your child’s future education?
Your financial situation and personal goals will influence how much money you can invest and which types of investments are suitable for you. Regardless of your strategy, it is generally wise to focus on long-term growth rather than short-term gains, as consistent long-term investing tends to produce more stable results.
Determine Your Risk Tolerance
Risk is an unavoidable part of investing, but different assets involve different levels of risk. For instance, bonds are usually considered less risky than stocks.
Another example is an Exchange Traded Fund (ETF). ETFs track specific market indexes. Imagine an index composed of dozens of companies within a particular industry, such as automobile manufacturing. An ETF that follows this index would invest in many of those companies simultaneously.
When you purchase shares of such an ETF, your investment is spread across multiple companies rather than relying on the performance of just one, which helps reduce overall risk through diversification.
Choose the Right Asset Classes
Understanding asset classes is essential when building an investment portfolio. Different asset classes often behave differently under the same economic conditions, which can help improve diversification.
For example, during periods when stock markets struggle, other assets such as real estate or gold may perform better. By spreading investments across several asset classes, investors can potentially reduce overall portfolio risk.
Select a Broker and Open an Account
Once you understand your risk tolerance and have an idea of where you want to invest, the next step is choosing a reliable broker.
Selecting the right brokerage platform is extremely important, as it will influence how you manage your investments over time. With so many brokers available today, it is important to evaluate them carefully and choose one that aligns with your investment needs and experience level.
Deposit Funds and Begin Investing
Most brokers allow you to fund your account through bank transfers or credit/debit cards. After depositing funds, you can start buying the securities you selected as part of your investment plan.
Keep in mind that trading platforms can differ significantly in terms of usability and features, so it is worth exploring which platform best suits your preferences before making your first investment.
Securities
Finding the best brokers
How to Identify the Right Broker for Your Needs
Our broker evaluations are based on a strictly independent research process that analyzes hundreds of different data points. Using this approach, our research indicates that Interactive Brokers ranks among the top platforms for trading stocks.
If you are curious about how this conclusion was reached, you can explore the detailed evaluation criteria used in the assessment process.
For those who are completely new to investing, it can also be helpful to look at curated lists of beginner-friendly brokers. These platforms are typically easier to use and are designed to help new investors get comfortable with buying and selling securities.
In addition, annual industry rankings highlight some of the strongest performers across various investment-related categories. These awards are updated every year to reflect recent developments and changes within the brokerage industry, helping investors stay informed about the latest trends.
Finally, if you still feel uncertain about which broker might suit you best, specialized comparison tools can analyze your preferences and investment goals to suggest brokerage platforms that align with your specific needs and circumstances.
Securities
How are securities regulated?
Securities are regulated by different authorities in each country. Regulation is aimed at ensuring that the appropriate amount of information is provided to investors and that they enjoy certain levels of protection.
In the US, on the federal level, the primary securities regulator is the Securities and Exchange Commission (SEC). There are also self regulatory organizations (SRO) like the Financial Industry Regulatory Authority (FINRA) in the US. In the European Union, the primary regulatory authority is the European Securities and Market Authority (ESMA) while in the UK, financial markets are overseen by the Financial Conduct Auhtority (FCA).