What is a Security?

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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 in or money loaned to a profit-seeking entity or governmental 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.

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New customers need to sign up, get approved, and link their bank account. The cash value of the stock rewards may not be withdrawn for 30 days after the reward is claimed. Stock rewards not claimed within 60 days may expire. See full terms and conditions at rbnhd.co/freestock. Securities trading is offered through Robinhood Financial LLC.

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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 from the investor 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.

Ready to start investing?
Sign up for Robinhood and get stock on us.Certain limitations apply

New customers need to sign up, get approved, and link their bank account. The cash value of the stock rewards may not be withdrawn for 30 days after the reward is claimed. Stock rewards not claimed within 60 days may expire. See full terms and conditions at rbnhd.co/freestock. Securities trading is offered through Robinhood Financial LLC.

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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 a 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.

Options trading entails significant risk and is not appropriate for all customers. Customers must read and understand the Characteristics and Risks of Standardized Options before engaging in any options trading strategies. Options transactions are often complex and may involve the potential of losing the entire investment in a relatively short period of time. Certain complex options strategies carry additional risk, including the potential for losses that may exceed the original investment amount.

Commission-free trading of stocks, ETFs and options refers to $0 commissions for Robinhood Financial self-directed individual cash or margin brokerage accounts that trade U.S. listed securities and certain OTC securities electronically. Keep in mind, other fees such as trading (non-commission) fees, Gold subscription fees, wire transfer fees, and paper statement fees may apply to your brokerage account. Check out Robinhood Financial’s Fee Schedule for details.

Brokerage services are offered through Robinhood Financial LLC, (RHF) a registered broker dealer (member SIPC) and clearing services through Robinhood Securities, LLC, (RHS) a registered broker dealer (member SIPC). Cryptocurrency services are offered through Robinhood Crypto, LLC (RHC) (NMLS ID: 1702840). Robinhood Crypto is licensed to engage in virtual currency business activity by the New York State Department of Financial Services. The Robinhood spending account is offered through Robinhood Money, LLC (RHY) (NMLS ID: 1990968), a licensed money transmitter. A list of our licenses has more information. The Robinhood Cash Card is a prepaid card issued by Sutton Bank, Member FDIC, pursuant to a license from Mastercard®. Mastercard and the circles design are registered trademarks of Mastercard International Incorporated. RHF, RHY, RHC and RHS are affiliated entities and wholly owned subsidiaries of Robinhood Markets, Inc. RHF, RHY, RHC and RHS are not banks. Products offered by RHF are not FDIC insured and involve risk, including possible loss of principal. RHC is not a member of FINRA and accounts are not FDIC insured or protected by SIPC. RHY is not a member of FINRA, and products are not subject to SIPC protection, but funds held in the Robinhood spending account and Robinhood Cash Card account may be eligible for FDIC pass-through insurance (review the Robinhood Cash Card Agreement and the Robinhood Spending Account Agreement).

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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 a 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.

Options trading entails significant risk and is not appropriate for all customers. Customers must read and understand the Characteristics and Risks of Standardized Options before engaging in any options trading strategies. Options transactions are often complex and may involve the potential of losing the entire investment in a relatively short period of time. Certain complex options strategies carry additional risk, including the potential for losses that may exceed the original investment amount.

Commission-free trading of stocks, ETFs and options refers to $0 commissions for Robinhood Financial self-directed individual cash or margin brokerage accounts that trade U.S. listed securities and certain OTC securities electronically. Keep in mind, other fees such as trading (non-commission) fees, Gold subscription fees, wire transfer fees, and paper statement fees may apply to your brokerage account. Check out Robinhood Financial’s Fee Schedule for details.

Brokerage services are offered through Robinhood Financial LLC, (RHF) a registered broker dealer (member SIPC) and clearing services through Robinhood Securities, LLC, (RHS) a registered broker dealer (member SIPC). Cryptocurrency services are offered through Robinhood Crypto, LLC (RHC) (NMLS ID: 1702840). Robinhood Crypto is licensed to engage in virtual currency business activity by the New York State Department of Financial Services. The Robinhood spending account is offered through Robinhood Money, LLC (RHY) (NMLS ID: 1990968), a licensed money transmitter. A list of our licenses has more information. The Robinhood Cash Card is a prepaid card issued by Sutton Bank, Member FDIC, pursuant to a license from Mastercard®. Mastercard and the circles design are registered trademarks of Mastercard International Incorporated. RHF, RHY, RHC and RHS are affiliated entities and wholly owned subsidiaries of Robinhood Markets, Inc. RHF, RHY, RHC and RHS are not banks. Products offered by RHF are not FDIC insured and involve risk, including possible loss of principal. RHC is not a member of FINRA and accounts are not FDIC insured or protected by SIPC. RHY is not a member of FINRA, and products are not subject to SIPC protection, but funds held in the Robinhood spending account and Robinhood Cash Card account may be eligible for FDIC pass-through insurance (review the Robinhood Cash Card Agreement and the Robinhood Spending Account Agreement).

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