Ever come across the word “security” while Googling how to invest and felt a bit confused?
No, it doesn’t have anything to do with protecting your passwords or installing a hidden camera in your home. In the investing sense, securities are broadly defined as financial instruments that hold value and can be traded between parties.
In other words, it’s a catch-all term for stocks, bonds, mutual funds, exchange-traded funds or other types of investments you can buy or sell. What it’s not: Tangible assets you might own, like your car, a home or even a bar of gold.
TYPES OF SECURITIES
The two most common types of securities you’re likely to come across are equity securities and debt securities.
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Equity securities generally refer to stocks, which are shares that you purchase in a company. When you buy an equity security, you own a piece of the company and have a stake in how the business performs. Stock performance moves up and down based on many factors, including how the economy is doing, how the business itself is doing, what’s happening in the world and other events you can’t really predict or control. There is risk involved with investing in stocks because they can be volatile.
Debt securities, also called fixed-income securities, generally refer to bonds, and they are what they sound like: investments in debt. When you buy a debt security you’re essentially lending money to a company or government entity. In return, you get periodic fixed-interest payments (hence where the term “fixed income” comes from) and you can get your full loaned amount back if you decide to hold onto the bond until its “due” date, better known as its maturity date. Certificates of deposit and other sources of fixed income can also be considered debt securities.
Although bonds are largely seen as safer investments than stocks, truth is they do come with risk — for example, the chance that the issuer of the bond could default, which means they may not be able to repay you. Also good to know about bonds: Bond prices move in the opposite direction of interest rates, which means that when interest rates rise, bond prices typically fall, and vice versa. So what’s happening with interest rates will affect the value of your bonds and what you to decide to do with them as part of a larger investing strategy.
Bottom line: The next time you hear the word securities, no need to get confused. Just think of them as a fancier way of saying stocks and bonds.
No investment strategy can guarantee a profit or protect against loss. All investing carries some risk, including loss of principal invested.
Past performance is no guarantee of future results. Examples are for illustrative purposes only and not indicative of any investment.
This article was originally published on LearnVest.com.