A security is a non-tangible financial asset used as a guarantee of repayment of a debt. The word is commonly used to describe any type of unsecured financial instrument, however its legal definition differs by country. In the United States the definition of security includes “any asset that can be converted into cash,” while in other countries it means “a promissory note or other instrument for the benefit of another.” While a security does not have an actual physical location, it is usually issued on the basis that the principal and interest will be repaid if the borrower pays. Therefore, most banks and other common financial institutions issue securities as a method of securing loans.
A derivative is a financial instrument that tracks the price of a stock or other publicly traded entity. Derivatives are included in almost all derivatives transactions, including interest rate swaps and forward contracts. A hybrid security is one that combines elements of a security or debt and a credit default swap. This type of financial instrument fluctuates in price depending upon the direction of the underlying asset. For example, the price of the stock will likely increase if the company reports positive earnings, which may result in the issuance of more equity.
A leveraged buyout (LBO) is when an investor sells certain percentage points of their total capital to raise funds for a particular purpose. An important part of the attractiveness of leveraged buyouts for potential investors lies in the fact that they offer higher returns to the initial financial institution than would be obtained from purchasing individually owned shares. However, there are significant risks associated with leveraged buyouts. Leverage typically applies to businesses rather than individual stocks or bonds. In addition, once the initial investment has been made, it is not feasible to raise additional funds in the same manner.
An equity share represents a fraction of a company’s ownership equity. Equity shares are always treated as cash instruments and are recorded during the balance sheet as assets for tax reporting purposes. These types of financial assets are relatively easy to manage, because dividends are paid on a regular basis. On the other hand, debt securities represent secured loans. These loans are secured by a borrower’s future income and future ability to pay. In general, debt securities are harder to sell than equity shares because the repayment terms are unknown.
As is the case with any loan, equity securities are repayable on a monthly basis. Some equity securities are call options; others are callable bonds. Call options are those whose strike price can be changed at any time up to the expiration date. Borrowed money security, on the other hand, represents an obligation of the borrower to repay the issuer at some point before the maturity date. The amount of the obligation and interest rate dictate the terms of the borrowing money security.
Futures and options are different from security and commodity trading in that they are not normally traded on stock exchanges. Instead, they are traded over the counter (OTC). The most common types of futures and options are currency futures, agricultural futures, gold futures and equity futures. Each of these contracts differs slightly from their underlying assets in that for a currency futures contract, for example, the buyer of the option must buy a quantity of one specific currency, whereas the holder of the option can buy or sell a quantity of one specific currency, or both. For example, if an investor is interested in owning gold for the long term, he could buy a call option which would provide him the right to purchase a certain volume of gold per month, instead of owning it outright.