What Are Securities?
Securities are financial documents that certify specific property rights for their owner upon presentation. They must be issued in accordance with their type and general standards for such documents.
Three common definitions of securities include:
- Security—a document whose presentation is required to exercise the rights it represents.
- Security—a standardized business document with monetary or property value and legal force.
- Security—a special form of capital existence that can be transferred instead of the capital itself, traded as a commodity on the market, and generate profit. Their essence is that the capital itself does not exist, but all rights to it are fixed in the security.
Types of Securities
By economic nature, securities are divided into equity securities, debt securities, and derivative financial instruments.
- Equity securities. Represent co-ownership or participation in forming the authorized capital and profit distribution (stocks).
- Debt securities. Serve as credit instruments (bonds, OFZ, bills of exchange, savings and deposit certificates)—written bank confirmations of deposited funds that certify the depositor’s right to receive the deposit and interest upon maturity. Certificates can be term or on demand, registered or bearer.
- Derivative financial instruments (options, futures, warrants, etc.). Certify the right to buy or sell securities (most often stocks).
Depending on purpose, securities are classified as stock securities and commercial papers.
- Stock securities (stocks, bonds). Instruments for investing capital, traded on the stock market, typically perpetual or with terms over one year.
- Commercial papers (bills of exchange, letters of credit, etc.). Credit instruments facilitating trade operations, traded on the money market. They are mostly short-term and used only partially for capital investment.
Securities are also divided into marketable ones, which can be resold, and non-marketable ones, which can be sold only once.
The most common securities are stocks (common, preferred), bills of exchange, bonds, options, checks, traveler’s checks, and mortgages. Each has specific issuance rules and purposes.
How Are Securities Issued?
Securities arise through emission, meaning their issuance and placement among holders, with free sale on the stock market. Securities are issued:
- to attract initial capital for a joint-stock company or increase it;
- for reorganizing a company into a joint-stock company;
- to change the rights of existing security holders;
- to attract additional investments (equity or borrowed).
Various types of securities can be issued by the state, government bodies, legal entities, and individuals.
What Is the Securities Market?
The securities market, or stock market, is the aggregate of transactions involving the issuance and circulation of various securities—stocks, bonds, certificates, mortgages, and others.
Its infrastructure is highly developed and covers nearly all economic sectors. The securities market organizes and enhances the efficiency of many economic processes, especially investments.
In exchange trading, stocks, bonds, and options are most common.
What Drives Security Prices?
Security prices on the stock exchange are determined by supply and demand. Using stocks as an example, supply comes from sellers, demand from buyers. Several factors influence this balance:
- Company’s financial condition. Demand and supply explain price changes, but investor decisions depend on the company’s finances. Low profits may cause prices to fall, but future prospects matter too. Investments in production upgrades could lead to future gains.
- Industry analysis. The sector’s overall state affects prices. Even a strong company may see declining stock if its industry stagnates.
- Economic trends. Analysts track GDP, inflation, interest rates, unemployment, trade balance, and budget deficit/surplus. Rising rates increase borrowing costs, potentially delaying projects.
- Another measure is the consumer price index, reflecting living costs. Rising prices reduce spending on luxuries and investments, harming the economy. Improving indicators boost profits and stock prices in a “bull market”; worsening leads to a “bear market.”
- Global and national events. Positive news like tax cuts lifts prices; negative news triggers sell-offs and declines.
FAQ
What is the main difference between stocks and bonds?
Stocks represent ownership in a company with potential for growth and dividends, while bonds are debt instruments paying fixed interest over time.
How do securities get issued?
Securities are issued through emission to raise capital, reorganize companies, adjust holder rights, or attract investments by states, firms, or individuals.
What determines security prices on the market?
Prices are set by supply and demand, influenced by company finances, industry conditions, economic indicators, and major events.
