What is 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.
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).
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.
There are two main groups of securities: equities and debt.
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).
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.
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.
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.
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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What is an IPO (Initial Public Offering)?
What is the Stock Market?
What is a Bond?
What is a Mutual Fund?
What is an Exchange Traded Fund (ETF)?
What is a Dividend?
What is Short Selling?
Short selling is an advanced trading strategy where you borrow shares of a stock, sell them at the current price, and hope the price falls so that you can repay the borrowed shares at a lower price.
What is a Trust?
A trust is a legal tool where one party (the trustor) gives control of assets to a second party (the trustee), to be held or used for the benefit of a third person (the beneficiary).
What is Capex?
Capex, short for capital expenditure, is an expense incurred by businesses to acquire, maintain, or improve a long-term asset, like buildings or equipment.
What is Return on Investment (ROI)?
Return on investment (ROI) tells you how well an investment is doing by comparing your profit to the amount of money you put in — and helps you compare different opportunities.
What is a Cryptocurrency?
A cryptocurrency, like Bitcoin, is a form of digital currency that typically is based on blockchain technology.