4 Types of Securities in the Stock Market: A Beginner’s Guide to Investing

This article is about different types of securities in the stock market which aims to provide basic guide to the beginners who are interested in investing. At first, the meaning and importance of stock market is discussed. Then, various types of securities are presented briefly. Finally, concluding remarks is made for the readers. Let’s start new learning.

types of securities in the stock market

Meaning and Importance of Stock Market

The stock market is such a marketplace where shares of companies that are publicly traded can be bought and sold. It provides a platform for companies to raise funds by selling equity shares, also known as stocks, to investors. After holding the shares of these stocks, they become shareholders of the company and have the potential to benefit from its profits and growth in the forms of dividend (a share of the company’s profits distributed to shareholders) and capital gain (increasing stock prices).

The stock market has a significant impact on the global economy as it enables the formation of capital, provides liquidity, and fosters the creation of wealth. Besides this, stock market generated many employment opportunities as a full time stock market trader, stock market analysts and many more.

Stocks, Bonds, Mutual Funds, Options, and Futures are the major types of securities that are traded in stock market.

NYSE, NASDAQ are the examples of US-based stock market.

Types of Securities in the Stock Market

4 major types of securities in the stock market are discussed below:

Stocks: Understanding the Foundation

Stocks are understood as a widely-used foundational investment instrument that play a major role in raising the ownership capital. In many geographical locations, stocks are also referred to as shares or equities. The capital raised from stocks are known by Ownership Capital, Share Capital or Equity Capital, but it is rarely said stock capital.

Characteristics of Stock

  • Ownership and Voting Rights: Shareholder are the actual owner of the company who have voting rights to elect board of directors.
  • Dividend Right: After deducting all the expenses, interest, and tax, stock holders are entitled to receive dividends from the residual income.
  • Asset Rights: If the company turn into liquidation, equity holders have legal right to receive remaining assets.
  • Pre-emptive Rights: It is a privilege to the existing stockholders that they have right to purchase newly issued share before it is offered to general public.

Different Types of Stocks

  • Common Stocks: Common stocks are widely-used to collect the basic ownership capital of a company. Common shareholders have voting rights to elect board of directors and receive dividends. On the other hand, these stockholders’ claims are subordinate to other stakeholders in case of liquidation.
  • Preferred Stocks: Preferred stocks are almost same as common stocks in basic nature but preferred stockholders have priority on the claim on the earnings of the company than that of common stockholders. Moreover Preferred shareholders do not have voting rights.

Bonds: Fixed-Income Securities

Securities that have pre-determined future rate of return are known as fixed-income securities. Bond is a fixed-income securities which is also one of the securities in the stock market. The market place where bonds are traded is also known as bond market.

Features of Bond

  • Face Value: Principal amount of per bond is known as face value of bond. It is mentioned on bond certificate. Interest is calculated on the basis of face value, no matter whether bond is issued at discount or premium.
  • Coupon Rate: The stated annual rate of interest on a bond is called coupon rate.
  • Maturity period: Bond have a specific maturity date. A specified time period on which the par value of bond must be repaid is called maturity period.
  • Call Provision: A provision on a bond certificate that gives the issuer company the right to redeem the bonds under specified terms prior to maturity date is called call provision of bond.
  • Convertibility: Bond may have convertibility feature, which means the provision to convert bond in to common stock after a certain period rather than redeeming them.

Types of Bonds

  • Government Bonds: Government bonds are considered as low-risky bond instrument because these are issued by national governments.
  • Corporate Bonds: Corporate Bonds are issued by corporations to meet their financial requirement. These bonds are more riskier than government bonds. The riskiness of corporate bonds depends on the financial stability of issuing corporation.
  • Municipal Bonds: Municipal bonds are generally issued by municipalities and local governments. These bonds may offer tax advantages to the investors.

Mutual Funds: Diversified Investment Vehicles

Mutual funds are the investment companies that collect money from multiple investors and invest that fund in a diversified portfolio of securities. It is also another securities in the stock market. Those mutual funds who issue new share and buy back the issued share are called open-ended mutual fund. Whereas, mutual funds having maturity period are called close-end mutual funds.

Investing in mutual funds have many advantages as follows:

  • Diversification: Mutual funds diversify its investment in to shares, bonds, fixed deposit, money market instruments, which means investors’ fund is also diversified accordingly.
  • Professional Management: These funds are managed by experienced and professional management who decide a the investing decision on the behalf of the fund’s shareholders.
  • Accessibility: The face value of mutual fund is usually fewer than that of common stock, so that small investors can also join the fund. Once they join it, they do not have to perform fundamental and technical analysis of securities of stock market because there is professional teams for this.

Options and Futures: Advanced Derivative Instruments

Among the 4 types of securities in the stock market, derivative instruments are also popular these days. Two complex derivative instruments options and futures are used for speculation and risk management. The price of such derivative instruments derived from other underlying securities such as stocks, commodities, or currencies. These are securities in the stock market but they are well-known as derivative market.

Call options and Put options are the major types of Options. Call options are used  In the case of possible rise in the price of the underlying asset, and it gives the holder the right to buy the underlying assets at a predetermine price before expiration date.

On the other hand, put options are used in the case of anticipation of decline in the price of the underlying assets. Put options give the holder the right to sell the underlying asset at a predetermined price before a specific date.

On futures contracts, at firs an agreement is made to buy or sell on underlying asset at a predetermined price on a specific future date.

Conclusion

Mainly there are 3 major types of Securities in the Stock Market, which are stocks, bonds, and derivatives. Beginners should have earned many knowledge from multiple sources to strengthen them. It is suggested to conduct research before investment and invest money according to own risk bearing capacity.

FAQs

What are the 4 types of securities?

Equity security (Common Stock), Debt Security (Debenture), Hybrid Security (Preferred Stock), and Derivatives (Options, Futures) are the 4 types of securities.

What is security in stock market?

Security is a financial instrument that is used to raise fund for the corporation and government and has monetary value. The ownership of security is transferable and hence they can be traded in stock market. Equity security, and debt security are common example of security in the financial context.

Is a mutual fund a security?

Yes, mutual fund is also a security like stock and bond because investors can purchase shares of mutual fund and trade them in stock market.

How securities are traded in stock market?

Securities in stock market are traded according to the exchange mechanism. Buyers place order to buy certain number of stocks at certain price, and sellers also place order to sell certain number of stocks at a certain price. If the quantity and price to buy and sell matches, securities trading successfully happens.

Is a bond a security?

Yes, a bond is a security which is called debt security. It has maturity period, fixed coupon rate and can be traded in stock/bond market.

Related Reads:

Rivian Stock Price Prediction for 2023 to 2050

Leave a Comment