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What Are Securities: The Different Types of Securities

January 04, 20243 min read

Many people do not understand the term securities. In fact, a large number of Americans own securities and do not even realize it.

Did you know that 54 percent of Americans are invested in the stock market? In addition to stocks, this figure includes pension plans and 401(k) retirement funds.

If you have one of these accounts, then you own securities. If you are wondering what are securities, read on for a comprehensive guide. Learn about the different types of securities and the benefits of ownership.

Equity Securities

Commonly known as stocks, equity securities are the type that most people are familiar with. When you turn on the news after work, the performance of the Dow Jones and S&P 500 are prominently on display.

These are referred to as index funds. The value of the S&P 500, for example, is a weighted average of the market capitalization of 500 companies in the United States. Similar to the S&P 500, the Dow Jones represents the 30 largest companies in the U.S.

You can purchase equity securities through a broker. There are also online options available like E*Trade. When you purchase a stock, you own a little piece of that company.

Some people elect to purchase equity securities through a mutual fund, which is a diverse portfolio of stocks. Many people are invested in mutual funds through their 401(k) retirement plan.

The average annual rate of return on the stock market is approximately 7 percent. Nearly half of these gains are derived from dividends, which some companies provide to their shareholders as an incentive.

Debt Securities

People are less familiar with debt securities. The most common forms of debt securities are bonds and certificate of deposit (CDs).

This type of security comes in the form of a loan. Essentially, you are loaning the government or bank money and they are in debt to you.

Each entity is assigned a safety rating of Standard, and Poor, or Moody. This rating evaluates the government or corporation's ability to pay you back. The safety rating is decreased as the entity's risk of defaulting on a loan grows.

What does this mean for investors? You earn money off the interest rate on the bond or CD. The interest rate is driven by the safety rating of the government or corporation. The higher the risk, the higher the reward is in terms of interest.

Derivative Securities

Of the three primary types of securities, derivatives are the least common. They are based on stocks, bonds, and assets. Derivative securities allow for a greater return on investment than buying these items directly.

Derivative securities come in the form of stock options or futures contracts. These forms of investment allow you to sell at a fixed rate on a future date.

What Are Securities? - Wrapping It Up

In the finance industry, securities are just a fancy word for the investments that a majority of Americans make. Whether it is the stock market or a government bond, more than half of Americans own some form of securities.

David

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