Whilst many have heard the term security before, equally many do not understand its implications as a noun. Within the financial space, a security is, put simply, a certificate or form of declaration which indicates that something is tradable, and therefore has a monetary value.
In general, securities come in three key forms, either equity securities, debt securities or derivatives, although there are many other, less common forms. Equity securities represent ownership in some form of entity, such as a company, trust or fund. Dividends are paid out by equity securities, but for the most part their value comes from their sale, when, assuming that the security has increased in value, its owner can make capital gains. They also entitle their owner to a limited form of control, including voting rights, which is set-out by the entity and can be negotiated.
On the other hand, a debt security represents the promise of repayment of an amount of money that has been lent to an individual or entity. These can come in the form of public and governmental bonds, certificates of deposit and collateralized securities (such as CDOs). Even banknotes technically represent a form of debt security.
Finally, the third form of security is a derivative, whose value is, as the name suggests, derived from the value of an underlying asset or group of assets. Examples include swaps, rights and options as well as forward and future contracts.
Owning any form of security, as is the case with every investment, comes with a degree of risk: to find out what the experts say, subscribe to Acquisition International Magazine today to read our commentary, interviews and features from experts across the financial industry!