what is a security 
the term security refers to a multitude of different investments such as stocks bonds investment contracts notes and derivatives for example a security can represent ownership in a corporation in the form of stock a creditor relationship with a governmental body or corporation in the form of a bond or rights to ownership in the form of an option investopedia daniel fishelunderstanding securitiesthe securities act of 1933 is the first federal legislation to regulate the u s stock market an authority that was previously regulated at the state level under the law anyone who wishes to sell investment contracts to the public must publish certain information regarding the proposed offering the company making the offering and the principal figures of that company these requirements are intended to protect the investing public from deceptive or misleading marketing practices the company and its leading figures are strictly liable for any inaccuracy in its financial statements whether intentional or not later legislation created the securities and exchange commission sec which is responsible for regulations and enforcement although the term securities is commonly associated with stocks bonds and similar instruments the u s supreme court gives the term a much broader interpretation in the case of howey vs sec 1946 the court found that the plaintiff s sale of land and agricultural services constituted an investment contract even though there was no trace of a stock or bond this case established the four prong howey test which states that an investment can be regulated as a security if under this rule it does not matter if a securities offering is formalized with a legal contract or stock certificates any type of investment offering can be a security on several occasions courts have enforced securities provisions on unconventional assets such as whiskey beavers and chinchillas the sec has also sought enforcement against issuers of cryptocurrencies and non fungible tokens 123types of securitiessecurities can be broadly categorized into two distinct types equity and debt however some hybrid securities combine elements of both equities and debts an equity security represents ownership interest held by shareholders in an entity a company partnership or trust realized in the form of shares of capital stock which includes shares of both common and preferred stock holders of equity securities are typically not entitled to regular payments although equity securities often do pay out dividends but they are able to profit from capital gains when they sell the securities assuming they ve increased in value equity securities do entitle the holder to some control of the company on a pro rata basis via voting rights in the case of bankruptcy they share only in residual interest after all obligations have been paid out to creditors they are sometimes offered as payment in kind a debt security represents borrowed money that must be repaid with terms that stipulate the size of the loan interest rate and maturity or renewal date debt securities which include government and corporate bonds certificates of deposit cds and collateralized securities such as cdos and cmos generally entitle their holder to the regular payment of interest and repayment of principal regardless of the issuer s performance along with any other stipulated contractual rights which do not include voting rights they are typically issued for a fixed term at the end of which they can be redeemed by the issuer debt securities can be secured backed by collateral or unsecured and if secured may be contractually prioritized over other unsecured subordinated debt in the case of bankruptcy hybrid securities as the name suggests combine some of the characteristics of both debt and equity securities examples of hybrid securities include equity warrants options issued by the company itself that give shareholders the right to purchase stock within a certain timeframe and at a specific price convertible bonds bonds that can be converted into shares of common stock in the issuing company and preference shares company stocks whose payments of interest dividends or other returns of capital can be prioritized over those of other stockholders although preferred stock is technically classified as an equity security it is often treated as a debt security because it behaves like a bond preferred shares offer a fixed dividend rate and are popular instruments for income seeking investors they are essentially fixed income securities a derivative is a type of financial contract whose price is determined by the value of some underlying asset such as a stock bond or commodity among the most commonly traded derivatives are call options which gain value if the underlying asset appreciates and put options which gain value when the underlying asset loses value an asset backed security represents a part of a large basket of similar assets such as loans leases credit card debts mortgages or anything else that generates income over time the cash flow from these assets is pooled and distributed among the different investors 4