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A “security” is a financial instrument that holds some kind of monetary value. Securities can take the form of debt securities (called “bonds”) or equity securities (in other words, shares). In a debt context, securities are really just I.O.U.’s. In other words, the security represents money that has been borrowed (and therefore must be repaid).
Typically, securities are issued by governments and companies which want to raise money. Raising finance through the issuance of a debt security can be cheaper than entering into a loan. The security will stipulate the amount of money being borrowed (often called the “par value”), the rate of interest being paid on that money (called the “coupon”), as well as the maturity date when the money will be repaid to the investor. Governments or companies issue securities which investors purchase. The security itself is a tradeable instrument – in the sense that the holder can sell or otherwise transfer it to a third party after it has been purchased.
As they represent an obligation to repay borrowed money, any investor who purchases a bond implicitly agrees to take credit risk on the issuing entity. The amount of credit risk is typically reflected in the coupon that is payable on the debt security – the greater the credit risk, the greater the coupon that the investor will require.
Securities are issued in two basic forms:
- Bearer securities; and
- Registered securities.