Search
LearnBlogCareersHelpLog InSign Up

What is a Security?

Kathleen ChaykowskiApril 29, 2020
Covered finance and business at Forbes and The Wall Street Journal. BA, Stanford University.
definition

A security is a financial item, such as a stock or a bond (a form of debt), that has monetary value, the holder has the risk of losing money on, and represents ownership or a credit in a profit-seeking entity.

🤔 Understanding a security

A security is a broad investment category that typically breaks down into two groups: an equity (a stock) or debt (a bond). If you’ve traded a stock, that’s a security. Sales of publicly traded securities are regulated by the Securities and Exchange Commission, which sets rules and boundaries around how they can be traded and how companies that issued securities provide info on them.

example

One example of an equity security is shares of common stock, which a private company may issue publicly for the first time when it becomes listed on the public market, as Uber did with its May 2019 initial public offering (IPO).

Takeaway

Picture securities as different vegetables you can plant in your garden...

They’re available in many varieties, such as stocks, bonds, ETFs, and mutual funds, but there’s a risk they don’t grow. They’re some of the most common investments people make in public markets for short or long term investments. And both companies and governments make them available to raise capital in public or private markets to support their operations.

Securities illo

Tell me more...

What types of securities are out there?
Why do securities exist?
Where do securities trade?
How are securities regulated?
What prompted the founding of the Securities & Exchange Commission?

What types of securities are out there?

There are two main groups of securities: equities and debt.

  1. Equity securities: Think stocks. Equity securities come with ownership rights. This means the shareholder in the original entity owns a portion of it. The rights that come with holding an equity, however, have limits. Equity owners don’t always receive regular payments (known as dividends) from a company based on the company’s profit and the size of their ownership. However, equity owners may be able to profit from their investment in the form of capital gains, which occur when the investor sells a security at a price that’s higher than what the investor originally paid for the security.
  2. Debt securities: This type of security represents money that is borrowed and must be repaid under specific conditions. Some common forms of debt securities are bonds, certificates of deposit (CDs), which often give the owner of the security a regular interest payment, regardless of how the entity that issued the security performs. Debt securities are usually issued for a fixed amount of time, after which the issuer can reclaim them.

It gets more intricate. There is also a third, less common category of securities called hybrid securities, which usually display some features of equity securities and some features of debt securities. Some examples: equity warrants (options that a company issues that enable shareholders to purchase stock within a particular time frame) or convertible bonds (bonds that can be turned into shares of common stock).

Why do securities exist?

In general, securities can be a useful way for companies, municipalities, and governments to raise new capital (aka money they can use to get stuff done). There are a few ways companies can raise this money. One is by going public, which allows companies to sell shares on the open market, in what’s known as an initial public offering (IPO). Meanwhile, county, city, or state governments can raise funds for projects by issuing municipal bonds, similarly to how national governments can issue bonds.

Where do securities trade?

Securities trade in different places, depending on whether the companies are public or private. Publicly traded securities, such as the stock of a public company, trade in the secondary market on stock exchanges (think the New York Stock Exchange or Nasdaq). Public securities can also be traded directly between parties in “over-the-counter” markets if the stock isn’t listed on one of the primary stock exchanges.

For private companies, it’s typically harder to trade their securities because they aren’t available on public markets. As a result, to buy or sell a security in a private company, an investor likely has to transfer their holdings directly back to the company or directly to qualified investors.

How are securities regulated?

In the US, publicly traded securities are regulated by the Securities and Exchange Commission, known as the SEC. This is an independent government agency that exists to protect investors and help ensure markets for trading are functional. The SEC also oversees all US public offerings, when companies make their shares available on the public markets for the first time.

What prompted the founding of the Securities & Exchange Commission?

The formation of the Securities and Exchange Commission (SEC) was prompted by the 1929 stock market crash, in which a number of U.S. companies went bankrupt. The US government formed the SEC when Congress passed the Securities Act of 1933, in a push to help repair people’s confidence in public markets. When it was created, its core responsibilities were to hold companies accountable for sharing accurate financial statements, and to promote fairness and reliability among brokers, dealers, and stock exchanges.

Today, the SEC promotes transparency in the markets by gathering, reviewing, and disclosing market-related information with the public. It's an agency whose focus is on consumer protection, and you can read more about its goals to help you here. The SEC requires companies to share their critical financial reports, registration statements, and other documents, which you can typically find on a publicly traded company’s “investor relations” website page, or even on an SEC page.

By clicking a third-party URL or hyperlink you’ll be accessing a third-party website. Robinhood Financial LLC is not implying that any monitoring is being done by Robinhood Financial LLC of any information contained on the third-party website. Robinhood Financial LLC is not responsible for the information contained on the third-party website or your use of or inability to use such site, and we don’t guarantee their accuracy and completeness.

20190702-890357-2679311

Related Articles

What is an IPO (Initial Public Offering)?

Updated April 29, 2020

What is the Stock Market?

Updated January 10, 2020

What is a Bond?

Updated May 11, 2020

What is a Mutual Fund?

Updated May 12, 2020

What is an Exchange Traded Fund (ETF)?

Updated April 29, 2020

What is a Dividend?

Updated April 29, 2020

You May Also Like

What is Dividend Payout Ratio?

February 27, 2020

A dividend payout ratio is the relation between a company dividend and its net income.

What is a Margin Call?

April 13, 2020

A margin call can occur when your broker asks you for money you’ve lost on an investment position. You previously invested with leverage (aka you borrowed funds to pay for part of your investment), and now your deposit needs ‘topping up’.

This information is educational, and is not an offer to sell or a solicitation of an offer to buy any security. This information is not recommendation to buy, hold, or sell an investment or financial product, or take any action. This information is neither individualized nor a research report, and must not serve as the basis for any investment decision. All investments involve risk, including the possible loss of capital. Past performance does not guarantee future results or returns. Before making decisions with legal, tax, or accounting effects, you should consult appropriate professionals. Information is from sources deemed reliable on the date of publication, but Robinhood does not guarantee its accuracy.
Robinhood Financial LLC provides brokerage services. Robinhood Securities, LLC, provides brokerage clearing services. Robinhood Crypto, LLC provides crypto currency trading. Robinhood U.K. Ltd (RHUK) provides brokerage services in the United Kingdom. All are subsidiaries of Robinhood Markets, Inc. ('Robinhood').
© 2020 Robinhood Markets, Inc. Robinhood® is a trademark of Robinhood Markets, Inc.