What is Financial Securities: Meaning, Types, & Advantages

July 9, 2024

Table of Contents

What are Financial Securities?

One of the key aspects of your personal loan journey is understanding financial securities. Securities is a tradable asset that holds monetary value such as stocks, bonds, investment contracts, notes, and derivatives. They are regulated by the Securities and Exchange Board of India (SEBI) and represent ownership in an entity.

Role of Securities in Finance

Securities allow the flow of capital from idle resources to those with a productive need. They aid in maintaining liquidity in the market. As an investor, you get to diversify your portfolio by investing in various types of financial securities by applying for personal loans. This approach not only helps in building wealth but also reduces risks associated with market fluctuations, offering stability and potential growth opportunities over time.

5 Types of Financial Securities

Securities are mainly categorised into 5 types as mentioned below:

Equity Securities

Equity represents ownership in a company. If you have equity in a company, you get voting rights and it allows you to share in profits through dividends. However, equity securities are known for their higher risks along with potential high returns, as compared to other types of securities.

Debt Securities

Debt security involves an investor lending money to governments, corporations or other entities. It is a low-risk investment as compared to equities. As an investor, you lend money to the issuer and get interest payments on the amount. The principal amount is given back at an agreed-upon future date. Corporate bonds, debentures, fixed deposits (FDs), commercial papers, and national savings certificates (NSCs) are common financial securities examples. They each offer varying terms and returns suited to different investment objectives and risk tolerances.

Derivative Securities

These securities derive their value or risk from an underlying asset or securities. They are also called secondary securities because they exist due to primary securities like bonds, stocks and commodities. Derivatives make you profit by betting on the future value of the underlying asset. Derivatives hegde you against market uncertainties like price fluctuations, interest rate and minimise risks. The common types of derivatives are swaps, forwards, futures, and options.

Hybrid Securities

Hybrid securities blend the elements of both equity and debt. They offer the fixed payment of a bond and give you the potential for capital appreciation of stock. Hybrid securities are of higher risk than bonds or stocks. While they may not be the preferred option of everyone, they do have higher returns than a bond. Convertible bonds and convertible preferred shares are examples of hybrid securities.

Asset-Backed Securities

These are financial instruments backed by underlying assets. These assets are loans, leases or receivables. Investors receive periodic payments rather than fixed payments. However, this also comes with increased risk. Asset-backed securities provide capital relief to banks and financial institutions while helping them convert illiquid assets into cash. Mortgage-backed securities, auto loan ABS, student loan ABS and credit card debt are few examples of these securities in India.

Also Read: The Dos and Don’ts of Personal Finance Planning

Regulation of Securities

The Securities and Exchange Board of India (SEBI) is the prime body that regulates the securities market. SEBI regulates by forming guidelines for the securities market. It ensures the promotion of fair practices and investors’ protection. It prohibits insider trading, fraud and other violations. The Reserve Bank of India (RBI) and the Ministry of Finance are other organisations that regulate the securities market.

Investing in Securities

Securities market is divided into primary and secondary markets. The primary market’s objective is to raise funds by issuing new securities through processes like Initial Public Offerings (IPOs). SEBI regulates this market to ensure fair practices. In contrast, the secondary market facilitates the trading of existing securities among investors for capital appreciation and liquidity. Here, investors can buy or sell shares and securities to others. Examples of stock markets in India include the Bombay Stock Exchange (BSE), National Stock Exchange of India (NSE), and Metropolitan Stock Exchange of India (MSE).

What are Marketable Securities?

Marketable securities are financial instruments that can be converted into cash within a short period. Equity and debt are the main types of marketable securities. These include stocks, treasury bills, commercial papers, certificate of deposits (CDs), and mutual funds. Investing in these securities offers several advantages such as liquidity, portfolio diversification, and relatively low risk. They give you income in the form of interest or dividends periodically. Marketable securities are used by companies and individuals alike to maintain liquidity and earn returns.

However, it’s crucial to recognize associated risks. For instance, bond values can fluctuate due to changes in interest rates, impacting returns. These securities give you lower returns than stocks or long-term bonds.

What Is The Difference Between Stocks And Securities?

	Stocks	Securities
Definition	Stock is a financial instrument that represents ownership in a company.	Securities is a broader term that includes many types of financial instruments, such as bonds, mutual funds, notes, debentures, and investment contracts.
Rights	Shareholders have voting rights in company decisions.	Typically, no voting rights.
Returns	Investors receive dividends as a share of company profits.	Returns vary: interest (for bonds), dividends (for some equities), or premiums (for derivatives).
Risk level	Considered high risk due to volatility in stock prices.	Low-risk (bonds) or high-risk (equity or derivatives).
Maturity	Stocks have no maturity date; ownership is ongoing.	Bonds have fixed maturity dates; other securities may or may not have specific maturity terms.
Payment Priority	Shareholders paid last (during liquidation).	Bondholders and creditors are typically paid before shareholders in liquidation scenarios. Bondholders and creditors paid before shareholders
Examples	TCS stocks, HUL stocks.	Wide range: stocks, bonds, mutual funds, options, futures, and derivatives. Stocks, bonds, mutual funds, options, futures, derivatives

How Can a Personal Loan Be Used as a Financial Securities?

Taking a personal loan is seamless and much quicker than before. With the onset of instant loans becoming the norm, here are the key benefits:

Debt consolidation:

Consolidating the debt loan that is high-interest into a single, lower-interest loan can indeed simplify your finances and potentially reduce overall interest costs.

Investments:

Taking a loan to invest can be beneficial if your investment returns exceed the cost of the loan. However, this strategy involves risks, including the possibility of investment losses that may outweigh potential gains.

Upskilling or Educational Loan:

Getting a business degree or a certificate course can get expensive. By taking an educational loan, you get lower interest rates and tax deductions on that loan amount.

Also Read: Personal Loan Tax Benefits | Tax Deduction & Tax Exemption

Conclusion

Understanding the different types of securities helps you plan investments that match your income, lifestyle, and goals—both short-term and long-term. By weighing the pros and cons of stocks, bonds, and derivatives, you can decide where to invest and how much. These financial tools are key to growing wealth, diversifying your investments, and managing risks effectively. Once you grasp which securities suit you best, creating a tailored financial plan becomes straightforward.

Frequently Asked Questions

What Is Meant By Financial Securities?

Financial securities are contracts that represent a financial asset tradeable in the financial markets. Some of the common types of financial securities are – stocks, bonds, mutual funds, exchange-traded funds, options, futures, derivatives etc

Why Is It Called Financial Security?

Financial security is planning your finances to cover your daily expenses, emergencies, and retirement. It gives you a sense of security about your finances being able to cover them in the future as well.

What Is The Goal Of Financial Security?

The goal of financial security is to be able to live a comfortable life while covering your daily expenses and having enough amount for any future emergency expenses as well.

What Is The Most Risky Financial Security?

Equity is the most risky security. While stocks give you higher returns, those returns depend on how well the company performs.

What Are The Keys To Financial Security?

Having a budget, saving, building an emergency fund, and investing as per your financial goals are key factors in building financial security.

What Is The Function Of Financial Securities?

Securities are financial instruments to raise funds. As an investor, it gives you liquidity and builds your portfolio.

How To Increase Financial Security?

Increase financial security by allocating a budget for expenses and investments. Build an emergency fund and have a retirement plan in place.

How To Find Financial Security?

The basic factor to remember is to not spend more than you earn. Additionally, if you have debt, pay it off soon. Once debt is cleared, you can allocate a percentage of your income to savings, and investments and to cover your daily expenses.

What Is The Difference Between Financial Security And Financial Freedom?

Financial security covers your basic expenses, medical emergency loan, and a few investments. Financial security implies no bad debt and enough savings to cover 6 months’ worth of expenses.Financial freedom means your current investments cover your basic investments and freedom to live life on your terms.