What is a Security (finance)?
Securities are financial assets that have monetary value and can be bought, sold or traded. Types of securities include equity securities, debt securities, derivative securities and hybrid securities.
Typically, an equity security represents some amount of ownership in a company, usually as stocks or shares. Equity securities can be preferred stock, common stock and convertible stock.
A debt security represents a loan made by an investor to a borrower. Debt securities are typically issued by governments and corporations when they borrow money from investors to finance their operations. These include bonds, promissory notes, bills and CDs.
A derivative security is a financial contract between private parties that derives its value from an underlying asset. The underlying asset could be commodities, land, stock options, bonds, interest rates, another derivative asset or almost anything. Derivatives are used to increase, speculate, leverage and hedge investments.
A hybrid security offers a combination of debt and equity security functions. Examples of hybrid securities include convertible bonds, preferred shared stock, capital notes and exchangeable bonds. They can provide flexibility and tend to be less risky investments.
Globally and in the US, the qualification of an asset as a security (or not) is significant to the world of distributed ledgers and cryptocurrencies. At the time of writing this glossary entry, a vigorous debate was underway in Washington, DC, where lawmakers and regulators were still trying to establish if cryptocurrencies qualified as securities (or if the security designation was specific to some cryptocurrencies and not others). Much of this debate centered on a four-point test known as The Howey Test, which helps determine if an asset is, or is not, a security.
The debate is particularly relevant to enterprises and other organizations that are either looking to offer a cryptocurrency as a part of their business strategy or thinking of holding some amount of cryptocurrency in reserves (even if only to pay distributed ledger technology transaction fees). In either case, those organizations have to keep close tabs on the hearts and minds of regulators so they don’t wake up one morning on the wrong side of the law.