Financial securities refer to tradable financial instruments that hold value and represent ownership or debt obligations. They are used to raise capital and facilitate investment and trading activities in financial markets. Here are some common types of financial securities:
We will discuss all securities in an elaborate way.
1.STOCKS
Also known as shares or equities, stocks represent ownership in a company. When you purchase a stock, you become a shareholder and have a claim on the company’s assets and earnings.
1.1 Preferred Stock: Preferred stock represents a class of stock that has a higher claim on the company’s assets and earnings than common stock. Preferred stockholders receive dividends before common shareholders and have a higher priority in the event of liquidation.
1.2 Common Equity: Common equity refers to the ordinary shares or stock of a company. Common shareholders have voting rights and are entitled to a portion of the company’s earnings in the form of dividends. They bear the highest risk but also have the potential for the highest returns.
1.3 Rights Issues: Rights issues occur when a company offers its existing shareholders the right to purchase additional shares at a discounted price. These rights are usually given in proportion to the shareholders’ current ownership, allowing them to maintain their percentage of ownership in the company.
1.4 Bonus shares: also known as scrip dividends or capitalization issues, are additional shares of a company’s stock that are distributed to existing shareholders at no cost. Bonus shares are issued by a company as a way to reward its shareholders and utilize its accumulated profits or reserves.
When a company issues bonus shares, it does not involve any cash outflow. Instead, the company capitalizes a portion of its retained earnings or reserves and converts them into additional shares. These bonus shares are then distributed to existing shareholders in proportion to their existing shareholding.
1.5 Sweat equity: refers to the contribution of labour, effort, or work that individuals put into a project or business venture, typically in exchange for a share of the ownership or profits. It is a non-monetary form of investment where individuals contribute their time, skills, or expertise instead of capital.
Sweat equity is commonly used in start-up’s or small businesses where the founders or early employees may not have sufficient funds to invest but are willing to contribute their skills and effort to make the venture successful. By providing sweat equity, these individuals earn a share of the company’s ownership or future profits.
2. BONDS
Bonds are debt securities issued by governments, municipalities, or corporations to raise capital. When you buy a bond, you are lending money to the issuer in exchange for regular interest payments and the return of the principal amount at maturity.
2.1 Convertible Bonds: Convertible bonds are debt instruments that can be converted into a predetermined number of shares of the issuer’s common stock. They offer investors the potential for capital appreciation if the stock price rises while still providing the regular interest payments of a bond.
2.2 Municipal Bonds: Municipal bonds, also known as munis, are debt securities issued by state and local governments or their agencies. They are used to finance public infrastructure projects such as schools, hospitals, and roads. Interest earned from municipal bonds is typically tax-exempt at the federal level and sometimes at the state and local levels as well.
2.3 Catastrophe Bonds: Catastrophe bonds, also known as CAT bonds, are insurance-linked securities. They provide insurance companies with financial protection against large-scale natural disasters or catastrophic events. Investors who purchase CAT bonds bear the risk of the specified events occurring and may receive higher yields in return.
2.4 Foreign Currency Bonds: Foreign currency bonds are debt securities issued in a currency different from the issuer’s domestic currency. They allow issuers to tap into international markets and provide investors with exposure to foreign currencies.
2.5 Social Impact Bonds: Social impact bonds, also known as pay-for-success bonds, are investment instruments that aim to finance social programs or initiatives. Investors provide upfront capital, and the returns are based on predefined social outcomes achieved by the program.
2.6 Revenue Bonds: Revenue bonds are municipal bonds issued by government entities or agencies to finance specific revenue-generating projects, such as toll roads, airports, or utilities. The repayment of these bonds is supported by the revenue generated by the project rather than the issuer’s taxing authority.
2.7 Infrastructure Bonds: Infrastructure bonds are debt securities issued by government entities or private corporations to finance infrastructure projects, such as highways, bridges, railways, or utilities. These bonds help fund the construction, maintenance, or improvement of public infrastructure.
2.8 Contingent Convertible Bonds (CoCos): CoCos are hybrid securities that have both debt and equity characteristics. They typically operate as bonds but can convert into equity or be written off if specific trigger events, such as a decline in the issuer’s capital ratio, occur.
2.9 Green Bonds: Green bonds are debt securities issued to finance projects with environmental benefits, such as renewable energy projects, energy efficiency initiatives, or sustainable infrastructure. The proceeds from these bonds are specifically allocated to environmentally friendly projects.
2.10 Government Savings Bonds: Government savings bonds are debt securities issued by governments to raise funds from individual investors. These bonds typically offer fixed interest rates and are considered relatively low-risk investments.
