You may know already that you can trade a wide range of assets – from stocks and shares to foreign currencies, commodities, indices and much more besides.
Grouped together, these are known as ‘securities’, and they are essentially a financial instrument that holds monetary value. You can invest in these through the primary and secondary markets.
A security dictates that you have ownership of something. So, if you own shares in a company, your security reflects your small holding in that firm. If you acquire government bonds, you own a creditor-style partnership with that government.
In broad terms, securities can be categorised in three groups: equity, debt, and a hybrid of the two.
An equity security is the classic right of ownership for investors.
You may own a slice of a company through the purchase of shares, and your ownership of said firm is relinquished whenever you sell your shares again.
Some equity securities pay out in dividends to shareholders, but for the most part, your profit comes from capital gains – selling your stock at a higher price than you acquired it for.
A debt security is, in essence, a loan between an issuer and an investor that is repaid periodically.
The borrowed money must be repaid in full, with each security coming with unique terms as far as the size of the loan, interest rates, and its renewal date are concerned.
Most debt securities are for a fixed-term period, at the end of which they can be redeemed by the issuer.
The most common type of debt security is a government bond. You, the investor, are essentially lending money to the government, which acts as the issuer. You are looking to profit from interest gained – however, note that a change in the rate will leave you exposed to risk.
As you may have guessed from the name, hybrid securities are a combination of equity and debt positions.
Although quite rare, examples of hybrid securities include convertible bonds (a bond that can be later converted into shares) and equity warrants (options for shareholders to purchase stocks within a given timeframe).
While considered investment with less risk than debt securities, it may be the case that hybrid securities have a lower ceiling for profit than equity securities.
How to invest in securities
You can invest in securities with a number of different trading brokers, though investors are advised to always check broker reviews before getting started.
You should always do your research before investing in any security, particularly with equity-based options, which can be volatile and deliver huge swings in value. Debt-based securities such as government bonds offer some protection, but again you are hoping that your investment pays off with interest rates offering an upturn in your bond’s value.
If you don’t want to invest in a specific security, you could join a mutual fund that invests your money for you. Again, there are risks attached, but at least you are investing in time-served professionals who know the various markets inside and out.