What Are Stocks And Securities?

Stocks are financial securities that represent part-ownership in one or more companies. Upon buying a company’s stock, you become a shareholder of that company. The stock certificate serves as proof of ownership and mentions the number of stocks you hold. You can buy stocks of a single company or several companies. There is no limit on the number of stocks you can hold in your portfolio.

In general, investors aim to buy the stocks of companies that are likely to increase in value. When such appreciation takes place, the stockholder can sell the stocks and earn a profit. Apart from this, as a result of their part-ownership, stockholders often receive a share of the company’s profits in the form of monthly, quarterly, or annual dividend payments. Buying stocks is thus a lucrative way to make money. Plus, it reduces the impact of market inflation over a period.

The Securities and Exchange Commission (SEC) provides a long paragraph defining the term security, which can be summarized as - ownership or debt that has value and may be sold. A security represents an investment, and the person holding the security does so to make a profit. Most securities can be bought and sold on an exchange, or a secondary market. Before investing became almost entirely electronic, the holder of security proved ownership through a piece of paper. Now, proof of ownership occurs more commonly through a computer file.

Types Of Stock

There are mainly two kinds of stocks: common stock and preferred stock.

• Common stock: Common stock investors have the right to vote at shareholders’ meetings. They also have a more directive stake in the company and receive company dividends at regular intervals.
• Preferred stock: Preferred stockholders are not given voting rights. However, they receive dividend payments ahead of common stockholders. Investors in this category are given more priority over common stockholders if the company goes bankrupt.

Both common and preferred stocks fall under the following categories:

• Growth stocks: Stocks of this category grow and earn at a faster rate than the usual market average. As they rarely offer dividends, capital appreciation is what investors hope for. A start-up tech company may offer this type of stock.
• Income stocks: These stocks pay dividends consistently and help an investor to generate regular income. An established utility company’s stocks would be an example of income stocks.
• Value stocks: These usually have a low price-to-earnings (PE) ratio. So, they are much cheaper than those with a higher PE ratio. They could be either growth or income stocks. People buying value stocks expect the stock price to rebound soon.
• Blue-chip stocks: These are the shares of big, well-known companies with a solid growth history. Such stocks generally pay dividends. Blue-chip stocks are common among investors due to the reliability of the company.

In addition, stocks can further be categorized by their market capitalisation and size. There are large-cap, mid-cap, and small-cap stocks. While shares of small companies are called microcap stocks, low-priced stocks are known as penny stocks.

Type Of Securities

1. Equity Securities

Equity almost always refers to stocks and a share of ownership in a company (which is possessed by the shareholder). Equity securities usually generate regular earnings for shareholders in the form of dividends. Equity security does, however, rise and fall in value in accord with the financial markets and the company’s fortunes.

2. Debt Securities

Debt securities differ from equity securities in an important way; they involve borrowed money and the selling of a security. They are issued by an individual, company, or government and sold to another party for a certain amount, with a promise of repayment plus interest. They include a fixed amount (that must be repaid), a specified rate of interest, and a maturity date (the date when the total amount of the security must be paid by).

Bonds, bank notes (or promissory notes), and Treasury notes are all examples of debt securities. They all are agreements made between two parties for an amount to be borrowed and paid back – with interest – at a previously-established time.

3. Derivatives

Derivatives are a slightly different type of security because their value is based on an underlying asset that is then purchased and repaid, with the price, interest, and maturity date all specified at the time of the initial transaction. The individual selling the derivative doesn’t need to own the underlying asset outright. The seller can simply pay the buyer back with enough cash to purchase the underlying asset or by offering another derivative that satisfies the debt owed on the first.

Conclusion

The difference between stock and securities is subtle. In most cases, the difference is not really significant. But you must know all sides of the stock vs share argument before taking the plunge into equity investments. Once you have an investment strategy in place, you can buy up individual shares and build a portfolio of stocks. Just remember to always diversify your portfolio and monitor your short- and long-term stock selection. This will safeguard your investments even when the markets are volatile.

Also Read: Where And How To Begin Your Financial Investments?

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Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised not to rely on the contents of the article as conclusive in nature and should research further or consult an expert in this regard.