Securities are tradable financial assets. They can be grouped into three categories

If you are a business needing money (financial capital) to expand, you can get a loan from a bank, that is one option. The bank then gives you a loan of, say, $1,000,000. You then will pay back the loan to the bank on schedule. This is a bank loan, and it cant be traded, although the bank might sell your loan to another bank if it wanted to.

You can also go to thecapital marketsto raise capital (get money). You probably cant do this on your own, so you will go to an investment bank to help you through the process.

Option 1 is issuing adebt security(a bond). The investment bank writes a bond for you and helps you sell it to investors. This bond is $1,000,000, and you promise to pay back the investors the debt on time, plus interest. The interest rate is fixed. If you are unable to pay them back, they can take control of your company and sell off your assets to get their money back; creditors (people who you owe money) have the right to take control from stockholders in such circumstances. The original investors can sell the bond to other investors if they want to. Bonds are actually safer than stocks, because creditors have priority over stockholders. Bondholders often get at least something back if the company goes bankrupt, although sometimes this can be pennies on the dollar.

Option 2 is for you to issueequity securities(stocks). Stocks are tiny pieces of the company; stockholders own shares of the firm. So you and the investment bank decide to sell 10,000 shares at $100 each, for a grand total of $1,000,000. Now they own a part of your company. Stockholders dont generally get paid interest, but they do sometimes get paid a portion of the profits, calleddividends. Stocks in a public company can only go to zero; the stockholders will never be liable for any additional money if the company was sued and ordered to pay a billion dollars; it would simply go bankrupt, and that would be the end of it.

Derivative securitiesinclude forwards, swaps, futures and options. These are basically bets on the price a commodity (anything from milk to corn to oil to cows to stocks to bets on interest rates and currencies, etc.). Companies use these to protect themselves against future price changes. If you are McDonalds, a beef is a major input, and if the price of beef doubled youd be hurt. So you insure against this by using derivatives so that even if beef gets more expensive you can buy it at a lower price. Same with oil; airliners suffer if oil prices rise, so some like Southwest use derivatives so they can purchase it at lower prices. Multinational corporations that do business in more than one country use derivatives to protect themselves from currency exchange rate fluctuations. If Apple is selling in Japan to the Japanese (who buy iPhones with Japanese yen) and then the price of the yen falls, they will have fewer dollars when they convert yen back into US dollars. So Apple could protect itself by using derivatives to insure against the Japanese yen falling.43.2k viewsView 159 UpvotersView Sharers

soJYgUppNowtLznhnfVsCGoLORoQrkZNTeCLaAdOXbeXrCyjUSMcoFxsoTOdNrmnUgoegZetUxJDTXPoSkRgfchMjChNEQSimArptiTvFVxrtLBEeLVzsY

The feedback you provide will help us show you more relevant content in the future.

What is the difference between stocks and securities?

What are the differences between shares and securities?

What is the difference between a stock exchange and a securities market?

What are the differences between securities, stocks, and shares?

What is the difference between security market and stock market?

Whats the difference between securities and investments?

What is the difference between bonds, stocks and securities?

What are the pros and cons of working with each of the major financial firms for investment and what do they specialize in? (Ex. Firm A has th…

Is there a difference between getting equity, stock, and shares? Is it better to get one over the other?

Does it matter if a financial contract is legally constituted as being a gamble vs. being a security? Ignoring liquidity, what are the leg…

Whats the difference between preferred and common stock?

What is the difference between a Stock Market and a Stock Exchange?

What is the difference between quoted securities and listed securities?

What is the difference between stocks and securities?

What are the differences between shares and securities?

What is the difference between a stock exchange and a securities market?

What are the differences between securities, stocks, and shares?

What is the difference between security market and stock market?

Whats the difference between securities and investments?

What is the difference between bonds, stocks and securities?

What are the pros and cons of working with each of the major financial firms for investment and what do they specialize in? (Ex. Firm A has th…

Is there a difference between getting equity, stock, and shares? Is it better to get one over the other?