Financial Securities
Financial security, also known as financial asset, is the legal document evidencing the investors’ right to receive prospective future benefits under stated conditions and to acquire or sell ownership interests. Financial securities are one of the best way to collect the required amount of capital for the company. Equity shares, preference shares, bonds, debentures, treasury bills, commercial papers, certificate of deposit, etc. are some of the example of financial securities. Financial securities may be short-term and long-term in nature. The financial securities having more than one years of maturity period are termed as long-term securities and vice-versa.
Here we have discussed about the three types of financial securities: Equity securities, Debt securities and Derivative securities.
1. Equity Securities
Equity securities are those financial securities which have direct contribution on the company’s capital and grant ( but not necessarily ) it’s holders an ownership right. Equity securities includes the ordinary shares and preference shares. By investing in the ordinary shares, investors become the owner of the company who have significant control over the business operation. They have also the voting rights through which they can choose perfect candidate as a board member. Whereas investors may or may not have an ownership rights by investing on the preference shares.
Equity securities provide it’s holders a right to claim over the profit of the business. They get dividend as a return which is uncertain (high profit – high dividend, low profit – low dividend, no profit – no dividend). The amount of dividend is depends upon the number of shares they have, company’s profit after tax and the dividend policy that the company adopt.
2. Debt Securities
Debt security, also known as debt instrument, is a paper of promise (in hard or soft form) that enables the issuing party to raise needed amount of capital by promising to repay an investors or lenders in accordance with terms of a contract. Promissory Notes, bonds, debentures, certificates of deposits, mortgages, leases or other agreements between a lender and a borrower are some of the example of debt instruments.
3. Derivative Securities
Derivative securities are financial contract which value is depends upon the value of underlying assets, securities or occurrence of an event. In other word, derivative securities are the paper of promise which value is derived from the value of underlying assets. Change in the value of assets also changes the value of derivative. Options, Future & Forward Contract, warrants, convertibles, swaps etc.are some of the example of derivative securities. These derivative securities are traded in the derivative market.