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A security is a tradable
financial asset A financial asset is a non-physical asset whose value is derived from a contractual claim, such as deposit (finance), bank deposits, bond (finance), bonds, and participations in companies' share capital. Financial assets are usually more market liq ...
. The term commonly refers to any form of
financial instrument Financial instruments are monetary contracts A contract is a legally binding document between at least two parties that defines and governs the rights and duties of the parties to an agreement. A contract is legally enforceable because it me ...
, but its legal definition varies by jurisdiction. In some countries and languages people commonly use the term "security" to refer to any form of financial instrument, even though the underlying legal and regulatory regime may not have such a broad definition. In some jurisdictions the term specifically excludes financial instruments other than
equities
 equities
and
fixed-income Fixed income refers to any type of investment Investment is the dedication of an asset to attain an increase in value over a period of time. Investment requires a sacrifice of some present asset, such as time, money, or effort. In finance ...
instruments. In some jurisdictions it includes some instruments that are close to equities and fixed income, e.g., equity warrants. Securities may be represented by a certificate or, more typically, they may be "non-certificated", that is in electronic ( dematerialized) or "
book entry Book entry is a system of tracking ownership of securities A security is a tradable financial asset. The term commonly refers to any form of financial instrument Finance is the study of financial institutions, financial markets and how the ...
only" form. Certificates may be ''bearer'', meaning they entitle the holder to rights under the security merely by holding the security, or ''registered'', meaning they entitle the holder to rights only if he or she appears on a security register maintained by the issuer or an intermediary. They include shares of corporate
stock In finance, stock (also capital stock) consists of all of the shares In financial markets A financial market is a market in which people trade financial securities and derivatives at low transaction costs. Some of the securities i ...

stock
or
mutual fund A mutual fund is a professionally managed investment fund An investment fund is a way of investment, investing money alongside other investors in order to benefit from the inherent advantages of working as part of a group such as reducing the ri ...
s,
bond Bond or bonds may refer to: Common meanings * Bond (finance) In finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with the creation and management of ...
s issued by corporations or governmental agencies,
stock option In finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with the creation and management of money and investments. Savers and investors have money availa ...
s or other options, limited partnership units, and various other formal investment instruments that are negotiable and
fungible In economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of good ...
. In the United Kingdom, the
Financial Conduct Authority The Financial Conduct Authority (FCA) is a financial regulatory body in the United Kingdom The United Kingdom of Great Britain and Northern Ireland, commonly known as the United Kingdom (UK) or Britain,Usage is mixed. The Guardian' and Tel ...
functions as the national
competent authority A competent authority is any person or organization that has the legally delegated or invested authority, capacity, or power to perform a designated function. Similarly, once an authority is delegated to perform a certain act, only the competent aut ...
for the regulation of financial markets; the definition in its ''Handbook'' of the term "security" applies only to equities,
debenture In corporate finance Corporate finance is the area of finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with the creation and management of money and ...
s, alternative debentures, government and public securities, warrants, certificates representing certain securities, units, stakeholder pension schemes, personal pension schemes, rights to or interests in investments, and anything that may be admitted to the Official List. In the United States, a security is a tradable
financial asset A financial asset is a non-physical asset whose value is derived from a contractual claim, such as deposit (finance), bank deposits, bond (finance), bonds, and participations in companies' share capital. Financial assets are usually more market liq ...
of any kind. Securities can be broadly categorized into: *
debt securities A security is a tradable financial asset A financial asset is a non-physical asset In financial accountancy, financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangible or i ...
(e.g.,
banknote A banknote (often known as a bill (in the US and Canada), paper money, or simply a note) is a type of negotiable promissory note A promissory note, sometimes referred to as a note payable, is a legal instrument ''Legal instrument'' is a ...
s, bonds, and
debenture In corporate finance Corporate finance is the area of finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with the creation and management of money and ...
s) *
equity securities
 equity securities
(e.g.,
common stock Common stock is a form of corporate equity Equity may refer to: Finance, accounting and ownership *Equity (finance), ownership of assets that have liabilities attached to them ** Stock, equity based on original contributions of cash or other va ...
s) * derivatives (e.g., forwards, futures, options, and swaps). The company or other entity issuing the security is called the
issuer Issuer is a legal entity that develops, registers, and sells Security (finance), securities for the purpose of financing its operations. Issuers may be governments, corporations, or investment trusts. Issuers are legally responsible for the oblig ...
. A country's regulatory structure determines what qualifies as a security. For example, private investment pools may have some features of securities, but they may not be registered or regulated as such if they meet various restrictions. Securities are the traditional method that commercial enterprises use to raise new capital. They may offer an attractive alternative to bank loans - depending on their pricing and market demand for particular characteristics. A disadvantage of bank loans as a source of financing is that the bank may seek a measure of protection against default by the borrower via extensive financial covenants. Through securities, capital is provided by investors who purchase the securities upon their initial issuance. In a similar way, a government may issue securities when it chooses to increase
government debt In public finance, government debt, also known as public interest, public debt, national debt and sovereign debt, is the total amount of debt owed at a point in time by a government or sovereign state to lenders. Government debt can be owed to ...
.


Debt and equity

Securities are traditionally divided into debt securities and equities (see also
derivatives Derivative may refer to: In mathematics and economics *Brzozowski derivative in the theory of formal languages *Derivative in calculus, a quantity indicating how a function changes when the values of its inputs change. *Formal derivative, an opera ...
).


Debt

Debt securities may be called
debenture In corporate finance Corporate finance is the area of finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with the creation and management of money and ...
s, bonds,
deposits A deposit account is a bank account maintained by a financial institution in which a customer can deposit and withdraw money. Deposit accounts can be savings accounts, Transaction account#Current accounts, current accounts or any of several other ...
,
notes Note, notes, or NOTE may refer to: Music and entertainment * Musical note In music, a note is a symbol denoting a musical sound. In English usage a note is also the sound itself. Notes can represent the Pitch (music), pitch and Duration (music), ...
or
commercial paper Commercial paper, in the global financial market, is an Unsecured debt, unsecured promissory note with a fixed Maturity (finance), maturity of rarely more than 270 days. In layperson terms, it is like an "wikt:IOU, IOU" but can be bought and so ...
depending on their maturity, collateral and other characteristics. The holder of a debt security is typically entitled to the payment of principal and interest, together with other contractual rights under the terms of the issue, such as the right to receive certain information. Debt securities are generally issued for a fixed term and redeemable by the issuer at the end of that term. Debt securities may be protected by collateral or may be unsecured, and, if they are unsecured, may be contractually "senior" to other
unsecured debt In finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with the creation and management of money and investments. Savers and investors have money availa ...
meaning their holders would have a priority in a bankruptcy of the issuer. Debt that is not senior is "subordinated".
Corporate bond A corporate bond is a bond Bond or bonds may refer to: Common meanings * Bond (finance) In finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with ...
s represent the debt of commercial or industrial entities. Debentures have a long maturity, typically at least ten years, whereas notes have a shorter maturity. Commercial paper is a simple form of debt security that essentially represents a post-dated cheque with a maturity of not more than 270 days. Money market instruments are short term debt instruments that may have characteristics of deposit accounts, such as
certificates of deposit A certificate of deposit (CD) is a time deposit, a financial product commonly sold by banks, Savings and loan association, thrift institutions, and credit unions. CDs differ from Savings deposit, savings accounts in that the CD has a specific, fix ...

certificates of deposit
, Accelerated Return Notes (ARN), and certain
bills of exchange A negotiable instrument is a document guaranteeing the payment of a specific amount of money, either on demand, or at a set time, whose payer is usually named on the document. More specifically, it is a document contemplated by or consisting of a c ...
. They are highly liquid and are sometimes referred to as "near cash". Commercial paper is also often highly liquid. Euro debt securities are securities issued internationally outside their domestic market in a denomination different from that of the issuer's domicile. They include eurobonds and euronotes. Eurobonds are characteristically underwritten, and not secured, and interest is paid gross. A euronote may take the form of euro-commercial paper (ECP) or euro-certificates of deposit. Government bonds are medium or long term debt securities issued by sovereign governments or their agencies. Typically they carry a lower rate of interest than corporate bonds, and serve as a source of finance for governments. U.S. federal government bonds are called ''treasuries.'' Because of their liquidity and perceived low risk, treasuries are used to manage the money supply in the
open market operation An open market operation (OMO) is an activity by a central bank A central bank, reserve bank, or monetary authority is an institution that manages the currency and monetary policy of a State (polity), state or formal monetary union, and over ...
s of non-US central banks. Sub-sovereign government bonds, known in the U.S. as
municipal bond A municipal bond, commonly known as a muni, is a bond Bond or bonds may refer to: Common meanings * Bond (finance) In finance Finance is the study of financial institutions, financial markets and how they operate within the financial sys ...
s, represent the debt of state, provincial, territorial, municipal or other governmental units other than sovereign governments. Supranational bonds represent the debt of international organizations such as the
World Bank The World Bank is an international financial institution An international financial institution (IFI) is a financial institution that has been established (or chartered) by more than one country, and hence is subject to international law. Its o ...

World Bank
, the
International Monetary Fund The International Monetary Fund (IMF) is an international financial institution, headquartered in Washington, D.C. ) , image_skyline = , image_caption = Clockwise from top left: the Washington Monument The ...

International Monetary Fund
, regional
multilateral development banks An international financial institution (IFI) is a financial institution that has been established (or chartered) by more than one country, and hence is subject to international law. Its owners or shareholders are generally national governments, alth ...
and others.


Equity

An equity security is a share of equity interest in an entity such as the capital stock of a company, trust or partnership. The most common form of equity interest is common stock, although preferred equity is also a form of capital stock. The holder of an equity is a shareholder, owning a share, or fractional part of the issuer. Unlike debt securities, which typically require regular payments (interest) to the holder, equity securities are not entitled to any payment. In bankruptcy, they share only in the residual interest of the issuer after all obligations have been paid out to creditors. However, equity generally entitles the holder to a pro rata portion of control of the company, meaning that a holder of a majority of the equity is usually entitled to control the issuer. Equity also enjoys the right to profits and
capital gain Capital gain is an economic concept defined as the profit Profit may refer to: Business and law * Profit (accounting) Profit, in accounting Accounting or Accountancy is the measurement, processing, and communication of financial an ...
, whereas holders of debt securities receive only interest and repayment of
principal Principal may refer to: Title or rank * Principal (academia) The principal is the chief executive and the chief academic officer of a university A university ( la, universitas, 'a whole') is an educational institution, institution of higher ...

principal
regardless of how well the issuer performs financially. Furthermore, debt securities do not have voting rights outside of bankruptcy. In other words, equity holders are entitled to the "upside" of the business and to control the business.


Hybrid

Hybrid securities combine some of the characteristics of both debt and equity securities. Preference shares form an intermediate class of security between equities and debt. If the issuer is liquidated, they carry the right to receive interest or a return of capital in priority to ordinary shareholders. However, from a legal perspective, they are capital stock and therefore may entitle holders to some degree of control depending on whether they contain voting rights. Convertibles are bonds or
preferred stock Preferred stock (also called preferred shares, preference shares, or simply preferreds) is a component of share capital __NOTOC__ A corporation's share capital
that can be converted, at the election of the holder of the convertibles, into the common stock of the issuing company. The convertibility, however, may be forced if the convertible is a
callable bondA callable bond (also called redeemable bond) is a type of bond Bond or bonds may refer to: Common meanings * Bond (finance) In finance Finance is the study of financial institutions, financial markets and how they operate within the financ ...
, and the issuer calls the bond. The bondholder has about 1 month to convert it, or the company will call the bond by giving the holder the call price, which may be less than the value of the converted stock. This is referred to as a forced conversion. Equity warrants are options issued by the company that allow the holder of the warrant to purchase a specific number of shares at a specified price within a specified time. They are often issued together with bonds or existing equities, and are, sometimes, detachable from them and separately tradeable. When the holder of the warrant exercises it, he pays the money directly to the company, and the company issues new shares to the holder. Warrants, like other convertible securities, increases the number of shares outstanding, and are always accounted for in financial reports as fully diluted earnings per share, which assumes that all warrants and convertibles will be exercised.


Classification

Securities may be classified according to many categories or classification systems: * Currency of denomination * Ownership rights * Terms to maturity * Degree of liquidity * Income payments * Tax treatment *
Credit ratingA credit rating is an evaluation of the credit risk of a prospective debtor (an individual, a business, company or a government), predicting their ability to pay back the debt, and an implicit forecast of the likelihood of the debtor Default (financ ...

Credit rating
* Industrial sector or "
industry Industry may refer to: Economics * Industry (economics) In macroeconomics, an industry is a branch of an economy that produces a closely related set of raw materials, goods, or services. For example, one might refer to the wood industry ...
". ("Sector" often refers to a higher level or broader category, such as ''Consumer Discretionary'', whereas "industry" often refers to a lower level classification, such as ''Consumer Appliances''. See
Industry Industry may refer to: Economics * Industry (economics) In macroeconomics, an industry is a branch of an economy that produces a closely related set of raw materials, goods, or services. For example, one might refer to the wood industry ...
for a discussion of some classification systems.) * Region or country (such as country of incorporation, country of principal sales/market of its products or services, or country in which the principal securities exchange where it trades is located) *
Market capitalization Market capitalization, commonly called market cap, is the market value of a publicly traded company A public company, publicly traded company, publicly held company, publicly listed company, or public limited company A public limited compan ...
* State (typically for municipal or "tax-free" bonds in the US)


Type of holder

Investors in securities may be
retail Retail is the sale of goods In economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), production, distribution (economics), distribution, and Consumption ( ...

retail
, i.e., members of the public investing personally, other than by way of business. In distinction, the greatest part of investment in terms of volume, is
wholesale Wholesaling or distributing is the sale of goods or merchandise Merchandising is any practice which contributes to the sale of products to a retail consumer A consumer is a person or a group who intends to order, orders, or uses purch ...
, i.e., by financial institutions acting on their own account, or on behalf of clients. Important
institutional investor An institutional investor is an entity which pools money to purchase Security (finance), securities, real property, and other investment assets or originate loans. Institutional investors include commercial banks, central banks, credit unions, S ...
s include
investment bank Investment is the dedication of an asset to attain an increase in value over a period of time. Investment requires a sacrifice of some present asset, such as time, money, or effort. In finance Finance is a term for the management, creati ...
s,
insurance Insurance is a means of protection from financial loss. It is a form of risk management Risk management is the identification, evaluation, and prioritization of risk In simple terms, risk is the possibility of something bad happening. ...

insurance
companies,
pension fund A pension fund, also known as a superannuation fund in some countries, is any plan, fund, or scheme which provides pension, retirement income. Pension funds typically have large amounts of money to invest and are the major investors in listed an ...
s and other managed funds. The "wholesaler" is typically an
underwriter Underwriting (UW) services are provided by some large financial institutions, such as banks, insurance companies and investment houses, whereby they guarantee payment in case of damage or financial loss and accept the financial risk for liability ...
or a
broker-dealerIn financial services Financial services are the economic services provided by the finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with the creation a ...
who trades with other broker-dealers, rather than with the retail investor. This distinction carries over to
banking A bank is a financial institution Financial institutions, otherwise known as banking institutions, are corporation A corporation is an organization—usually a group of people or a company—authorized by the State (polity), stat ...

banking
; compare
Retail banking Retail banking, also known as consumer banking or personal banking, is the provision of services by a bank A bank is a financial institution Financial institutions, otherwise known as banking institutions, are corporation A co ...
and
Wholesale banking Wholesale banking is the provision of services by bank A bank is a financial institution that accepts Deposit account, deposits from the public and creates a demand deposit while simultaneously making loans. Lending activities can be directly ...
.


Investment

The traditional economic function of the purchase of securities is investment, with the view to receiving
income In microeconomics Microeconomics is a branch of mainstream economics Mainstream economics is the body of knowledge, theories, and models of economics, as taught by universities worldwide, that are generally accepted by economists as a bas ...
or achieving
capital gain Capital gain is an economic concept defined as the profit Profit may refer to: Business and law * Profit (accounting) Profit, in accounting Accounting or Accountancy is the measurement, processing, and communication of financial an ...
. Debt securities generally offer a higher rate of interest than bank deposits, and equities may offer the prospect of capital growth.
Equity investment in Dutch). Stock trading in Dutch). Stock trading activity, as we know it today, was originally a 17th-century Dutch investing technique. File:NY stock exchange traders floor LC-U9-10548-6.jpg, Historical photo of stock traders and stockbroker ...
may also offer control of the business of the issuer. Debt holdings may also offer some measure of control to the investor if the company is a fledgling start-up or an old giant undergoing 'restructuring'. In these cases, if interest payments are missed, the creditors may take control of the company and liquidate it to recover some of their investment.


Collateral

The last decade has seen an enormous growth in the use of securities as
collateral Collateral may refer to: Business and finance * Collateral (finance) In loan agreement, lending agreements, collateral is a Borrower, borrower's pledge (law), pledge of specific property to a lender, to Secured loan, secure repayment of a loan. ...
. Purchasing securities with borrowed money secured by other securities or cash itself is called "
buying on margin In finance, margin is the collateral (finance), collateral that a holder of a financial instrument has to deposit with a counterparty (most often their broker or an Exchange (organized market), exchange) to cover some or all of the credit risk th ...
". Where A is owed a debt or other obligation by B, A may require B to deliver
property right The right to property or right to own property (cf. ownership) is often classified as a human right for natural persons regarding their possessions. A general recognition of a right to private property is found more rarely and is typically heavily ...
s in securities to A, either at inception (transfer of title) or only in default (non-transfer-of-title institutional). For institutional loans, property rights are not transferred but nevertheless enable A to satisfy its claims in case B fails to make good on its obligations to A or otherwise becomes
insolvent In accounting Accounting or Accountancy is the measurement ' Measurement is the number, numerical quantification (science), quantification of the variable and attribute (research), attributes of an object or event, which can be used to comp ...
. Collateral arrangements are divided into two broad categories, namely
security interest In finance Finance is a term for the management, creation, and study of money In a 1786 James Gillray caricature, the plentiful money bags handed to King George III are contrasted with the beggar whose legs and arms were amputated, in ...
s and outright collateral transfers. Commonly, commercial banks, investment banks, government agencies and other institutional investors such as
mutual fund A mutual fund is a professionally managed investment fund An investment fund is a way of investment, investing money alongside other investors in order to benefit from the inherent advantages of working as part of a group such as reducing the ri ...
s are significant collateral takers as well as providers. In addition, private parties may utilize stocks or other securities as collateral for portfolio loans in
securities lending In finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with the creation and management of money and investments. Savers and investors have money available ...
scenarios. On the consumer level, loans against securities have grown into three distinct groups over the last decade: 1) ''Standard Institutional Loans,'' generally offering low loan-to-value with very strict call and coverage regimens, akin to standard margin loans; 2) ''Transfer-of-Title (ToT) Loans,'' typically provided by private parties where borrower ownership is completely extinguished save for the rights provided in the loan contract; and 3) Non-Transfer-of-Title Credit Line facilities where shares are not sold and they serve as assets in a standard lien-type line of cash credit. Of the three, transfer-of-title loans have fallen into the very high-risk category as the number of providers has dwindled as regulators have launched an industry-wide crackdown on transfer-of-title structures where the private lender may sell or
sell short In finance, being short in an asset means investing in such a way that the investor will profit if the Market value, value of the asset falls. This is the opposite of a more conventional "Long (finance), long" Position (finance), position, wher ...

sell short
the securities to fund the loan. Institutionally managed consumer securities-based loans on the other hand, draw loan funds from the financial resources of the lending institution, not from the sale of the securities. Collateral and sources of collateral are changing, in 2012 gold became a more acceptable form of collateral. However more recently Exchange-traded funds (ETFs) seen by many as the ugly ducklings of the collateral world have started to become more readily available and acceptable. But in a world where collateral is becoming scarce and efficiency is everything, many of these mallards are proving themselves to be not so ugly after all—many more are veritable swans. The problem, until now, for collateral managers has been deciphering the bad eggs from the good, which proves to be a time-consuming and inefficient task.


Markets


Primary and secondary market

Public securities markets are either primary or secondary markets. In the primary market, the money for the securities is received by the issuer of the securities from investors, typically in an
initial public offering An initial public offering (IPO) or stock launch is a public offering A public offering is the offering of securities A security is a tradable financial asset. The term commonly refers to any form of financial instrument, but its legal defi ...
(IPO). In the secondary market, the securities are simply assets held by one investor selling them to another investor, with the money going from one investor to the other. An initial public offering is when a company issues public stock newly to investors, called an "IPO" for short. A company can later issue more new shares, or issue shares that have been previously registered in a shelf registration. These later new issues are also sold in the primary market, but they are not considered to be an IPO but are often called a "secondary offering". Issuers usually retain
investment bank Investment is the dedication of an asset to attain an increase in value over a period of time. Investment requires a sacrifice of some present asset, such as time, money, or effort. In finance Finance is a term for the management, creati ...
s to assist them in administering the IPO, obtaining SEC (or other regulatory body) approval of the offering filing, and selling the new issue. When the investment bank buys the entire new issue from the issuer at a discount to resell it at a markup, it is called a firm commitment underwriting. However, if the investment bank considers the risk too great for an underwriting, it may only assent to a best effort agreement, where the investment bank will simply do its best to sell the new issue. For the primary market to thrive, there must be a
secondary market The secondary market, also called the aftermarket and follow on public offering, is the financial market A financial market is a market (economics), market in which people trade financial Security (finance), securities and derivative (finan ...
, or aftermarket that provides liquidity for the investment security—where holders of securities can sell them to other investors for cash. Otherwise, few people would purchase primary issues, and, thus, companies and governments would be restricted in raising equity capital (money) for their operations. Organized exchanges constitute the main secondary markets. Many smaller issues and most debt securities trade in the decentralized, dealer-based
over-the-counter Over-the-counter (OTC) drugs are medicine Medicine is the Art (skill), art, science, and Praxis (process) , practice of caring for a patient and managing the diagnosis, prognosis, Preventive medicine, prevention, therapy, treatment or Palliat ...
markets. In Europe, the
principal trade A principal trade occurs when a brokerage house buys securities A security is a tradable financial asset A financial asset is a non-physical asset In financial accountancy, financial accounting, an asset is any resource owned or controlled ...
organization for securities dealers is the International Capital Market Association. In the U.S., the principal trade organization for securities dealers is the Securities Industry and Financial Markets Association, which is the result of the merger of the Securities Industry Association and the Bond Market Association. The Financial Information Services Division of the Software and Information Industry Association (FISD/SIIA) represents a round-table of market data industry firms, referring to them as Consumers, Exchanges, and Vendors. In India the equivalent organisation is the securities exchange board of India (SEBI).


Public offer and private placement

In the primary markets, securities may be offered to the public in a
public offer A public offering is the offering of securities A security is a tradable financial asset. The term commonly refers to any form of financial instrument Finance is the study of financial institutions, financial markets and how they operate ...
. Alternatively, they may be offered privately to a limited number of qualified persons in a
private placement Private placement (or non-public offering) is a funding round of securities which are sold not through a public offering A public offering is the offering of securities of a company or a similar corporation to the public. Generally, the securitie ...
. Sometimes a combination of the two is used. The distinction between the two is important to securities regulation and
company law Corporate law (also known as business law or enterprise law or sometimes company law) is the body of law Law is a system A system is a group of Interaction, interacting or interrelated elements that act according to a set of rules t ...
. Privately placed securities are not publicly tradable and may only be bought and sold by sophisticated qualified investors. As a result, the secondary market is not nearly as liquid as it is for public (registered) securities. Another category,
sovereign bond A government bond or sovereign bond is an Financial instrument, instrument of indebtedness (a Bond (finance), bond) issued by a national government to support government spending. It generally includes a commitment to pay periodic interest, call ...
s, is generally sold by auction to a specialized class of dealers.


Listing and over-the-counter dealing

Securities are often listed in a
stock exchange A stock exchange, securities exchange, or bourse is an exchange Exchange may refer to: Places United States * Exchange, Indiana Exchange is an Unincorporated area, unincorporated community in Green Township, Morgan County, Indiana, Green To ...
, an organized and officially recognized market on which securities can be bought and sold. Issuers may seek listings for their securities to attract investors, by ensuring there is a liquid and regulated market that investors can buy and sell securities in. Growth in informal electronic trading systems has challenged the traditional business of stock exchanges. Large volumes of securities are also bought and sold "over the counter" (OTC). OTC dealing involves buyers and sellers dealing with each other by telephone or electronically on the basis of prices that are displayed electronically, usually by
financial data vendor A financial data vendor provides market data to financial firms, traders, and investors. The data distributed is collected from sources such as stock exchange feeds, brokers and dealer desks or regulatory filings (e.g. an SEC filing). History Fin ...
s such as SuperDerivatives,
Reuters Reuters (, ) is an international news organisation owned by Thomson Reuters. It employs around 2,500 journalists and 600 photojournalists in about 200 locations worldwide. Reuters is one of the largest news agencies in the world. The agency w ...
, Investing.com and
BloombergBloomberg may refer to: People * Daniel J. Bloomberg (1905–1984), audio engineer * Georgina Bloomberg (born 1983), professional equestrian * Michael Bloomberg Michael Rubens Bloomberg (born February 14, 1942) is an American businessma ...

Bloomberg
. There are also eurosecurities, which are securities that are issued outside their domestic market into more than one jurisdiction. They are generally listed on the
Luxembourg Stock Exchange The Luxembourg Stock Exchange, LuxSE (French language, French: ''Bourse de Luxembourg'') is based in Luxembourg City at 35A boulevard Joseph II. The Chair (official), chairman of the board is Frank Wagener and the president of the executive commi ...
or admitted to listing in
London London is the capital Capital most commonly refers to: * Capital letter Letter case (or just case) is the distinction between the letters that are in larger uppercase or capitals (or more formally ''majuscule'') and smaller lowerc ...

London
. The reasons for listing eurobonds include regulatory and tax considerations, as well as the investment restrictions.


Securities Services

Securities services refers to the products and services that are offered to institutional clients that issue, trade, and hold securities. The bank engaged in securities services are usually called a custodian bank. Market players include
BNY Mellon The Bank of New York Mellon Corporation, commonly known as BNY Mellon, is an American investment banking An investment bank is a financial services Financial services are the economic services provided by the finance Finance is the study ...

BNY Mellon
,
J.P. Morgan
J.P. Morgan
,
HSBC HSBC Holdings plc is a British multinational Multinational may refer to: * Multinational corporation, a corporate organization operating in multiple countries * Multinational force, a military body from multiple countries * Multinational state, ...

HSBC
and
Citi Citigroup Inc. or Citi (stylized File:Les Demoiselles d'Avignon.jpg, ''Les Demoiselles d'Avignon'' (1907), also by Picasso in a different style ("Picasso's African Period") four years later.In the visual arts, style is a "...distinctive mann ...

Citi
etc.


Market

London is the centre of the eurosecurities markets. There was a huge rise in the eurosecurities market in London in the early 1980s. Settlement of trades in eurosecurities is currently effected through two European computerized clearing/depositories called
Euroclear Seat of Euroclear Bank in Kraków, Poland Euroclear is a Belgium-based financial services company that specializes in the settlement of securities transactions, as well as the safekeeping and asset servicing of these securities. It was founded in ...
(in Belgium) and
Clearstream Clearstream is a post-trade services provider owned by Deutsche Börse AG. It provides settlement and custody as well as other related services for securities A security is a tradable financial asset. The term commonly refers to any form of ...
(formerly Cedelbank) in Luxembourg. The main market for Eurobonds is the EuroMTS, owned by Borsa Italiana and Euronext. There are ramp up market in Emergent countries, but it is growing slowly.


Physical nature


Certificated securities

Securities that are represented in paper (physical) form are called certificated securities. They may be ''bearer'' or ''registered''.


DRS securities

Securities may also be held in the Direct Registration System (DRS), which is a method of recording shares of stock in book-entry form. Book-entry means the company's transfer agent maintains the shares on the owner's behalf without the need for physical share certificates. Shares held in un-certificated book-entry form have the same rights and privileges as shares held in certificated form.


Bearer securities

Bearer securities are completely negotiable and entitle the holder to the rights under the security (e.g., to payment if it is a debt security, and voting if it is an equity security). They are transferred by delivering the instrument from person to person. In some cases, transfer is by endorsement, or signing the back of the instrument, and delivery. Regulatory and fiscal authorities sometimes regard bearer securities negatively, as they may be used to facilitate the evasion of regulatory restrictions and tax. In the
United Kingdom The United Kingdom of Great Britain and Northern Ireland, commonly known as the United Kingdom (UK) or Britain,Usage is mixed. The Guardian' and Telegraph' use Britain as a synonym for the United Kingdom. Some prefer to use Britain as shorth ...

United Kingdom
, for example, the issue of bearer securities was heavily restricted firstly by the ''Exchange Control Act'' 1947 until 1953. Bearer securities are very rare in the United States because of the negative tax implications they may have to the issuer and holder. In Luxembourg, the law of 28 July 2014 concerning the compulsory deposit and immobilization of shares and units in bearer form adopts the compulsory deposit and immobilization of bearer shares and units with a depositary allowing identification of the holders thereof.


Registered securities

In the case of registered securities, certificates bearing the name of the holder are issued, but these merely represent the securities. A person does not automatically acquire legal ownership by having possession of the certificate. Instead, the issuer (or its appointed agent) maintains a register in which details of the holder of the securities are entered and updated as appropriate. A transfer of registered securities is effected by amending the register.


Non-certificated securities and global certificates

Modern practice has developed to eliminate both the need for certificates and maintenance of a complete security register by the issuer. There are two general ways this has been accomplished.


Non-certificated securities

In some jurisdictions, such as France, it is possible for issuers of that jurisdiction to maintain a legal record of their securities electronically. In the
United States The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country Continental United States, primarily located in North America. It consists of 50 U.S. state, states, a Washington, D.C., ...

United States
, the current "official" version of Article 8 of the
Uniform Commercial Code The Uniform Commercial Code (UCC), first published in 1952, is one of a number of Uniform Act In the United States The United States of America (USA), commonly known as the United States (U.S. or US), or America, is a country Contiguous ...

Uniform Commercial Code
permits non-certificated securities. However, the "official" UCC is a mere draft that must be enacted individually by each
U.S. state In the United States The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country Continental United States, primarily located in North America. It consists of 50 U.S. state ...
. Though all 50 states (as well as the
District of Columbia ) , image_skyline = , image_caption = Clockwise from top left: the Washington Monument The Washington Monument is an obelisk within the National Mall The National Mall is a Landscape architecture, landscape ...

District of Columbia
and the
U.S. Virgin Islands The United States Virgin Islands, officially the Virgin Islands of the United States,Also called the ''American Virgin Islands'' are a group of Caribbean islands and an unincorporated and organized territory of the United States The U ...

U.S. Virgin Islands
) have enacted some form of Article 8, many of them still appear to use older versions of Article 8, including some that did not permit non-certificated securities.


Global certificates, book entry interests, depositories

To facilitate the electronic transfer of interests in securities without dealing with inconsistent versions of Article 8, a system has developed whereby issuers deposit a single global certificate representing all the outstanding securities of a class or series with a universal depository. This depository is called The Depository Trust Company, or DTC. DTC's parent,
Depository Trust & Clearing Corporation The Depository Trust & Clearing Corporation (DTCC) is an American Trade (financial instrument), post-trade financial services company providing clearing (financial), clearing and settlement (finance), settlement services to the financial markets. ...
(DTCC), is a non-profit cooperative owned by approximately thirty of the largest Wall Street players that typically act as brokers or dealers in securities. These thirty banks are called the DTC participants. DTC, through a legal nominee, owns each of the global securities on behalf of all the DTC participants. All securities traded through DTC are in fact held, in electronic form, on the books of various intermediaries between the ultimate owner, e.g., a retail investor, and the DTC participants. For example, Mr. Smith may hold 100 shares of Coca-Cola, Inc. in his brokerage account at local broker Jones & Co. brokers. In turn, Jones & Co. may hold 1000 shares of Coca-Cola on behalf of Mr. Smith and nine other customers. These 1000 shares are held by Jones & Co. in an account with Goldman Sachs, a DTC participant, or in an account at another DTC participant. Goldman Sachs in turn may hold millions of Coca-Cola shares on its books on behalf of hundreds of brokers similar to Jones & Co. Each day, the DTC participants settle their accounts with the other DTC participants and adjust the number of shares held on their books for the benefit of customers like Jones & Co. Ownership of securities in this fashion is called
beneficial ownership Beneficial ownership is a term in domestic and international commercial law which refers to the natural person or persons "who ultimately own or control a legal entity or arrangement, such as a company, a trust, or a foundation". The legal owner (i ...
. Each intermediary holds on behalf of someone beneath him in the chain. The ultimate owner is called the beneficial owner. This is also referred to as owning in "Street name". Among brokerages and mutual fund companies, a large amount of mutual fund share transactions take place among intermediaries as opposed to shares being sold and redeemed directly with the transfer agent of the fund. Most of these intermediaries such as brokerage firms clear the shares electronically through the National Securities Clearing Corp. or "NSCC", a subsidiary of DTCC.


Other depositories

Besides DTC, two other large securities depositories exist, both in Europe: Euroclear and Clearstream.


Divided and undivided security

The terms "divided" and "undivided" relate to the proprietary nature of a security. Each divided security constitutes a separate asset, which is legally distinct from each other security in the same issue. Pre-electronic bearer securities were divided. Each instrument constitutes the separate covenant of the issuer and is a separate debt. With undivided securities, the entire issue makes up one single asset, with each of the securities being a fractional part of this undivided whole. Shares in the secondary markets are always undivided. The issuer owes only one set of obligations to shareholders under its memorandum, articles of association and company law. A
share Share may refer to: * Share, to make joint use of a resource (such as food, money, or space); see Sharing * Share (finance), a stock or other financial security (such as a mutual fund) * Share, Kwara, a town and LGA in Kwara State, Nigeria Share ma ...
represents an undivided fractional part of the issuing company. Registered debt securities also have this undivided nature.


Fungible and non-fungible securities

In a fungible security, all holdings of the security are treated identically and are interchangeable. Sometimes securities are not fungible with other securities, for example different series of bonds issued by the same company at different times with different conditions attaching to them.


Regulation

In the US, the public offer and sale of securities must be either registered pursuant to a registration statement that is filed with the
U.S. Securities and Exchange Commission The U.S. Securities and Exchange Commission (SEC) is a large independent agency of the United States federal government, created in the aftermath of the Wall Street Crash of 1929 The Wall Street Crash of 1929, also known as the Great Crash ...
(SEC) or are offered and sold pursuant to an exemption therefrom. Dealing in securities is regulated by both federal authorities (SEC) and state securities departments. In addition, the brokerage industry is supposedly self policed by Self Regulatory Organizations (SROs), such as the
Financial Industry Regulatory Authority The Financial Industry Regulatory Authority (FINRA) is a private American corporation that acts as a self-regulatory organization A self-regulatory organization (SRO) is an organization that exercises some degree of regulatory authority over an in ...
(FINRA), formerly the National Association of Securities Dealers (or NASD) or the MSRB. With respect to investment schemes that do not fall within the traditional categories of securities listed in the definition of a security (Sec. 2(a)(1) of the
Securities Act of 1933 The Securities Act of 1933, also known as the 1933 Act, the Securities Act, the Truth in Securities Act, the Federal Securities Act, and the '33 Act, was enacted by the United States Congress The United States Congress is the legislature ...
and Sec. 3(a)(10) of the 34 act) the US Courts have developed a broad definition for securities that must then be registered with the SEC. When determining if there is an "investment contract" that must be registered the courts look for an investment of money, a common enterprise and expectation of profits to come primarily from the efforts of others. See '' SEC v. W.J. Howey Co.''


See also

*
Commercial law Commercial law, also known as mercantile law or trade law, is the body of law that applies to the rights, relations, and conduct of Legal person, persons and business engaged in commerce, merchandising, trade, and sales. It is often considered ...
*
Finance Finance is a term for the management, creation, and study of money In a 1786 James Gillray caricature, the plentiful money bags handed to King George III are contrasted with the beggar whose legs and arms were amputated, in the left corn ...

Finance
*
Financial market A financial market is a market (economics), market in which people trade financial Security (finance), securities and derivative (finance), derivatives at low transaction costs. Some of the securities include stocks and Bond (finance), bonds, ra ...
*
Financial regulation Financial regulation is a form of regulation Regulation is the management of complex systems A complex system is a system composed of many components which may interaction, interact with each other. Examples of complex systems are Earth's ...
*
History of private equity and venture capital The history of private equity and venture capital and the development of these asset classes has occurred through a series of boom-and-bust cycles since the middle of the 20th century. Within the broader private equity industry, two distinct sub-i ...
*
Interest in securities {{Unreferenced, date=November 2007 An interest in securities is the asset of a client for whom an intermediary holds securities A security is a tradable financial asset. The term commonly refers to any form of financial instrument, but its lega ...
*
List of finance topics The following outline is provided as an overview of and topical guide to finance: Finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with the creation a ...
*
Securities analyst A financial analyst is a professional, undertaking financial analysis Financial analysis (also referred to as financial statement analysis or accounting analysis or Analysis of finance) refers to an assessment of the viability, stability, and profi ...
*
Securities lending In finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with the creation and management of money and investments. Savers and investors have money available ...
*
Securities regulation in the United States Securities regulation in the United States is the field of U.S. law that covers transactions and other dealings with securities. The term is usually understood to include both federal and state-level regulation by governmental regulatory agencies, ...
*
Settlement (finance) Settlement of securities is a business process whereby securities A security is a tradable financial asset. The term commonly refers to any form of financial instrument, but its legal definition varies by jurisdiction. In some countries and lan ...
*
Single-stock futuresIn finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with the creation and management of money and investments. Savers and investors have money available w ...
*
Stock market data systems Stock market data systems communicate market data Example of a stock chart, the stock shown is SourceForge, Inc. In finance, market data is price and Trader (finance), trade-related data for a financial instrument reported by a trading venue such ...
*
T2S T2S (TARGET2-Securities) is a European securities A security is a tradable financial asset. The term commonly refers to any form of financial instrument, but its legal definition varies by jurisdiction. In some countries and languages people co ...
* Toxic security * Trading account assets


Notes

{{DEFAULTSORT:Security (Finance) Securities (finance), Stock market