What Are Securities?

For anyone looking to build wealth through long-term investing, securities are essential. A portfolio of securities is crucial to avoid falling victim to purchasing power loss due to inflation. But what exactly are securities? What types exist, and how can you profit from them?

 

What You Need to Know

 

• • At its core, a security is a document that certifies a (financial) right to its holder.

• • In everyday terms, securities typically refer to financial instruments, often tradable on stock exchanges.

• • The most important types of securities for individual investors include stocks, bonds, fund shares, ETFs, and certificates.

• • Securities vary widely in their risks and the strategies used to trade them.

• • For wealth building, securities are indispensable. Individual investors benefit from combining higher-risk stock ETFs for returns with low-risk, high-quality government bonds for safety.
    
    

How to Get Started

Our investment guide provides a comprehensive overview of different types of securities and key investing principles.
To buy, manage, and trade a security, you need to open a brokerage account. Comparing savings plans can help you find a cost-effective (or free) brokerage account.
Many online brokers offer user-friendly platforms where you can open and verify an account digitally. Happy trading!

What Is a Security?

A security (often called a “security” in English) is fundamentally a document that certifies a financial right, such as ownership in a company or a debt obligation. The defining feature of it is their transferability: the rights they represent can typically change owners through trading, with the new owner holding the certified rights. However, the holder must prove ownership of the security to claim these rights. Today, “paper” is a metaphorical term, as most of these are digital, managed, stored (via “clearing”), and traded electronically.

Different Definitions of Securities

As a foundational concept, “security” has multiple definitions. A broad definition describes a security as a document granting its holder a financial right, enforceable by presenting the security. A narrower definition might include only tradable securities, excluding non-tradable ones like registered securities. In common usage, “securities” typically refers to tradable financial instruments on stock exchanges.

Types of Securities

Securities encompass a wide range of financial instruments, which can be categorized based on who benefits from them:

 

• • Bearer Securities: The most common type for investing, these grant rights to whoever holds them, making them easily tradable on exchanges (e.g., bearer stocks).

• • Order Securities: These specify a named beneficiary, such as named stocks, but can still be traded by transferring ownership.

• • Registered Securities: A subset of order, these benefit only the named holder (e.g., mortgage bonds or savings books, though the latter’s classification as a security is debated).

In practice, the most common exchange-traded securities for individual investors include:

Stocks
Stocks are the best-known type of security. They come in two forms:

 

• • Bearer Stocks: Valid for the holder and easily tradable on exchanges.

• • Named Stocks: Assigned to a specific person, limiting tradability unless ownership is transferred.

For example, some companies issue named stocks to comply with regulations, requiring approval for sales to maintain specific ownership structures. Stocks represent ownership in a company, making shareholders co-owners and contributing to the company’s equity capital. They also grant rights like voting at shareholder meetings and potential dividend payments.

Profits from stocks come from:

 

• • Capital Gains: Realized when selling a stock at a higher price than the purchase price.

• • Dividends: Periodic profit-sharing payments to shareholders.

Fund Shares
Investment funds allow investors to diversify with minimal capital by pooling money into a broad range of securities. Common types include:

 

• • Actively Managed Funds: Managed by professionals who select and trade security to outperform the market.

• • Exchange-Traded Funds (ETFs): Passively track an index, like the MSCI World, which includes thousands of stocks from developed markets. ETFs are known for transparency and low costs, and they can be traded anytime on exchanges.

Bonds
Bonds, also called debt securities, are essentially loans. The issuer borrows money from the bondholder and repays it with interest at the end of a fixed term. Examples include government or corporate bonds, issued by states or companies, respectively. Bonds issued by entities with high credit ratings are predictable and low-risk, as they provide fixed interest payments. For companies, bond proceeds are considered debt capital, and bondholders are creditors, not owners.

Certificates

Certificates are a specialized form of debt securities issued by financial institutions, like banks. Holders are creditors of the issuer, who owes them money. Unlike bonds, certificates are not fixed-income; their value depends on underlying assets, such as stocks, commodities, or indices. This makes them similar to derivatives, often speculative, with risks ranging from high to minimal depending on the underlying asset. A key risk is issuer default, where the issuer cannot repay, leaving certificate holders with losses.

Trading Securities Explained

Not all of them are easily tradable, but most can be bought and sold on exchanges or over-the-counter (OTC). Here’s how to build your portfolio in four steps:

 

1. 1. Strategy and Risk Profile: Define your financial goals (e.g., buying a car or long-term wealth building) and risk tolerance to shape your investment strategy.

1. 1. Selection: Based on your strategy, choose one that align with your goals, from low-risk bonds to higher-risk stocks. Keep your portfolio simple and select specific security, like particular ETFs.

1. 1. Open a Brokerage Account: If you don’t have one, open a brokerage account with an online broker or bank. Many platforms offer affordable, user-friendly options.

1. 1. Buying and Selling: Trading incurs fees, but many online brokers offer low-cost or flat-rate models. Start small, stick to your strategy, and only invest in the one you understand. Trade during market hours to avoid excessive fees.

Investment Strategies

Security supports a wide range of strategies, but two main approaches stand out: active and passive investing.

 

• • Active Investing: This involves analyzing and selecting a security to outperform the market. Actively managed funds, for example, rely on professional teams to pick securities, aiming for higher-than-average returns. However, these come with higher fees due to management costs.

• • Passive Investing: This seeks to match market returns by investing broadly, often through global stock ETFs that track indices like the MSCI World. Benefits include low costs, transparency, and consistent holding of security based on fixed rules.

Should You Invest in Securities?

A security portfolio is vital for wealth building and preservation, as it generates returns unlike savings accounts or money market products. The choice of security and strategy depends on your goals and risk tolerance. Conservative investors may prefer portfolios heavy in secure government bonds with a small stock or fund allocation, while risk-tolerant investors may focus on stocks for higher returns. The question isn’t whether to invest in security, but which ones and how.