Investment Securities Explained
What is an Investment Security?
Investment securities are tangible certificates or documents that indicate ownership or interest in a business, asset, debt instrument, or government entity.
There are two common types of investment securities: debt securities (such as bonds, Collateralized debt obligation, mortgage-backed securities, or debt-issued derivatives) and equity securities (such as common stock or options).
Investment securities may be purchased on a market place or an alternative listing (such as the Pink Sheets or Over-the-Counter) with the fundamental purpose of earning a profit. Individuals, businesses, or government entities will purchase investment securities to diversify their funds and attempt to generate a profit following the sale of their particular investment security.
Debt Obligation Investment Securities:
A debt obligation investment security is a type of financial instrument where the investor purchases a form of debt from the issuer. Bonds, which are the most common form of debt obligation investment security, are issued by corporations, municipalities, or government entities. When an individual or business entity purchases a bond from the aforementioned issuers they are in essence lending the institutions money for the promise that the issuer will recoup the principal investment in addition to interest payments. The money obtained through the issuance of a bond is used to finance expenditures and provide public services. In turn, the investor will make a profit off the bond (assuming the issuer doesn’t default) through the obtainment of coupon payments.
Bonds are issued with varying maturity dates, coupon payments, and interest rates. Regardless of the specifics associated with the investment security, all bonds are considered debt-instruments that are supplied by the issuer to raise money and are purchased by the investor to earn a profit through the obtainment of interest payments.
Other forms of debt obligation securities include: Treasury Bonds, Treasury Bills, General Obligation and Revenue Bonds, Participating bonds, Zero Coupon Bonds, Convertible Bonds, Treasury Notes, High Yield (Junk) Bonds, Indexed Bonds, Mortgage Backed Securities, Warrant Bonds, Sinking Bond Funds, and Commercial Paper.
Equity Investment Securities
Investment Securities that take the form of equity are typically purchased as shares, which represent partial ownership in a publicly-traded company. The investment in such a company will earn a profit if the stock price exceeds the investor’s purchase price. The following examples are regarded as equity investment securities: common stock, par value, book value stocks, dividends, ex-dividends, treasury stocks, depository receipts, DRIPS, commodities, and varying classes of stock.
In addition to generic stock purchases, investors may purchase derivatives, which are financial instruments that are connected to their underlying security.
NEXT: Municipal Bond
