Well, its Wednesday so you all know what that means! It’s time for the term of the week.
This week lets talk a little about the term “Securities”. Now this is an extremely broad term so I will try to keep it as simple as I can. Its one of those subjects you could read about all day and just scratch the surface.
A Security is any tradeable and fungible (able to replace or be replaced by a like item) asset which is traded on some kind of market. Most fall under one of two categories: debt or equity. There are a few fall into a hybrid category but they are much less common. There is an endless amount of debate on the merits and drawbacks of each category of security so keep in mind that certain points in this will be my opinion.
Debt securities: When you are in debt you are in BONDage. Most debt securities fall into the category of bonds. I will go much deeper into what a bond is later but in a quick nutshell these are notes which can be issued by a government (federal, state or municipality) or a corporation which carry the promise of a certain payout at the end or “maturity” of the bond.
The good: Debt securities can often be safer than most equity securities. Due to the fact that you are legally owed a return on your investment, holders of debt securities have a better chance of receiving payment if an entity files for chapter 7 or chapter 11 bankruptcy. Additionally these assets tend to have a slower but less prone to fluctuation increase in value.
The bad: Debt securities often have less returns that their equity securities. The “slow and steady” performance of debt securities can be less exciting than their equity counterparts.
Equity securities: The potential of stocks are limitless! Iv’e always thought that when purchasing equity securities you are purchasing the “potential” of the issuer could be at any point in the future. As you can tell from the first sentence in this paragraph, the vast majority of equity securities bought and sold are stocks. I would argue that equity securities, especially stocks are the backbone of most peoples investments and is the most effective way to grow wealth.
The good: Historically speaking equity securities have had a higher rate of return. Consider the average rate of return for the S&P 500 of 10% annually. Many famous investors such as Warren Buffet are proponents for stock indexes. Essentially if you are betting against the S&P 500 or the DJIA you are betting against the will and resources of the United States.
The bad: Unfortunately there can be some pretty large fluctuations with equity securities. Think of all of the corrections, sell-offs, crashes, recessions and depressions that have happened in the global market since the concept of markets were first conceived. The silver lining to this is that we have always and will always recover.
Like I said earlier this is an immensely broad subject and if you are ever looking to open a can of worms there is an endless amount of information you can read about when it comes to securities. Just remember, there is money to be made in both types of securities but you can make any money off investments if you aren’t in the game. Its much easier to have time in the market than to time the market.
Fine Finance 