Investments are an effective way to earn money, but before investing, it is important to get to grips with the terminology: what are securities, how are they classified, and how to determine their purpose and value.
What are Securities?
A security is a combination of financial and/or non-financial rights of its owner set based on legislative documents or without them. In a broad sense, it is a document that certifies the owner’s authority exercised at the time of its presentation. Security is effective if the process of its drawing up is not violated and if it contains all the required details.
Classification of securities
Securities are classified according to several indicators. At the master class on investment education https://ffin.am/en/academy/ you can learn which type of securities is the most favorable for receiving regular income.
Securities are usually classified as follows:
- by the term of existence – there are fixed-term (having a specified term) and unsated securities, limited only by the period during which the issuer exists;
- by the form of the issue – the securities are divided into a documentary (rights are transferred when the owner of the share changes) and a non-documentary when the transfer of rights is recorded in the register of owners. In addition, securities can be issuing and non-issuing (not creating new powers on the asset);
- by origin – the securities are divided into basic (e.g. shares, bills of exchange, depositors’ units, bonds) and derivative (futures and options);
- by the type of holder’s rights registration – there are bearer securities, as well as warrant and registered securities containing information about the owner, while the warrant type is free for transferring to third parties;
- by circulation – the securities are divided into marketable, those that can be purchased at the stock exchange, and non-marketable, those that have no circulation on the stock market.
It is worth noting that when a purchase or sale is made, the owner’s rights to a share of the total income or interest payment are transferred to the new owner.
Issuance of securities
This term refers to the procedure of selling and the process of issuing new securities to the financial market by a company in order to provide additional income. Companies issue securities to take advantage of various types of financing, for example, to repay debts, to pay for new projects, to expand their business, etc.
Equity securities include:
- depositary receipts;
- shares;
- options;
- bonds, etc.
The issuance process consists of several stages, which may vary depending on the type of securities, legislation, and other circumstances.
Main stages
1. Preparatory stage
The company identifies the objectives and scope of the issue, as well as the type of future securities. In addition, the company analyzes financial indicators, prepares documentation, and selects a credit organization that will be involved in the process.
2. Placement stage
The company launches the sale of securities. The placement is carried out either in the primary market (when securities are first issued) or in the secondary market (when existing securities are sold to investors).
3. Drawing up documentation
Preparation of the issue draft, execution of the sale and purchase agreement, conclusion of the agreement with the investor bank, and other documents.
4. Registration stage
After the sale, the securities are registered under the established procedure. The new owners are included in special registers.
5. Interest accrual and receipt of dividends
In case the papers are considered to be debt or dividend securities.
Each of the above stages is a complex process consisting of several intermediate steps. The issuance procedure as a whole requires not only time but also effort.
Securities Depositories
A financial institution that provides services for the safekeeping and exchange of securities is known as a depository. It is usually an intermediate element between the issuer and investors, guaranteeing the safe transfer of securities.
The services that depositories provide include:
- Safekeeping – protecting against theft, loss, or deterioration;
- Clearance and transfer – efficient settlement and rapid exchange between the issuer and investors;
- Cash disbursements: depositories are empowered to settle accrued dividends and interest;
- Processing of actions – not only issuing new securities but also providing for a change of ownership of securities;
- Reporting: providing investors with documentation of account balances, transactions, and other changes.
- Depositories increase the transparency of securities transactions, simplify the process of trading them, and help reduce costs.
How do I get income from a security?
There are several ways of making profits from the purchase of securities, such as investing and trading.
Investments
This method allows for minimizing any risks. The investor studies the situation in the market and calculates the probable threats and the dividends from a variety of shares. The traditional approach of investing is designed to generate a constant income for a certain period (several years). Giving preference to a certain type of shares, one emphasizes the type of issuer, the lower threshold of dividend income, and other conditions.
The main income of a bondholder is limited to coupon payments. Sometimes such a purchase is more profitable than shares even with dividends. Redeeming bonds, the owner unambiguously receives its initial value, while shares may become cheaper. Besides, in case of bankruptcy of the issuer, bond payments are made first of all.
Trading
This is an alternative to the first method, involving a regular turnover of securities with the intention of gaining profit due to the price difference between purchases and sales. There are several trading strategies developed, but each of them involves a high risk, as the trader’s profit depends on his/her ability to predict the price dynamics. During the period of economic instability, the value of shares of leading companies can either dramatically fall, or equally quickly grow back to the previous values.
The choice of profit option depends on the amount of investor’s capital, strategic objectives, and the situation on the stock market.
