What is a Security?
🤔 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.
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.
The free stock offer is available to new users only, subject to the terms and conditions at rbnhd.co/freestock. Free stock chosen randomly from the program’s inventory. Securities trading is offered through Robinhood Financial LLC.
What types of securities are out there?
There are two main groups of securities: equities and debt.
- 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.
- 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.
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