Financial markets around the world are divided into different segments, one of the most important segments in financial markets is “securities”. In this article, with help an essay From the Inostopedia website, you will learn about the definition of securities, their types, investment and trading in this field, and its legislative status.
What are securities?
Securities are any asset or right that is non-physical in nature, is legally recognized and can be sold.
In most countries, securities include the following:
- A position of ownership in companies that are publicly traded on the stock exchange (shares on the stock exchange)
- A credit relationship from a public or private entity (bonds)
- Or a right of ownership of a derivative financial instrument (futures contract or option contract)
Simply put, securities are legally binding promises that can be bought, sold, or exchanged for something valuable.
Consider this example to better understand securities. Someone writes on a piece of paper:
I will transfer my car to the holder of this card on April 10, 1400.
If the certificate is approved by a government or legal entity, it becomes a security; That is, the sheet that has value. So this card is valuable and people may be interested in buying or selling this card. Obviously, if the car stays safe and sound before delivery, the value of the ticket will also increase. On the other hand, if there is a problem with the car, people will be less interested in having the card and, as a result, its value will decrease.
Types of securities
Securities can be divided into two main categories: stocks and debt. However, there is another category called hybrid, which combines some of the characteristics of stocks and bonds. In the following, we will become more familiar with these three categories.
“Stocks” or “equity securities” are the most common type of securities. A stock is an ownership interest held by shareholders in an entity (such as a company) and is a type of capital market share. Securities include two categories of common stock and pre-stock.
Shareholders usually do not receive regular receipts, although in some cases they do receive dividends. But the main profit of the shareholders from this investment is the profit that comes from the sale of the shares (securities) (assuming that the value of the share has increased).
Shareholders have the right to share control of the company with the amount of their shares. The impact factor of each shareholder’s vote is proportional to the share he has. In case of bankruptcy of the company, the shareholders, after paying all the obligations to the creditors, divide the remaining assets of the company among themselves according to their share. If the company’s financial assets are not sufficient to pay its obligations to creditors, the debt will be paid from the company’s goods or services.
“Debt securities” represent money that has been borrowed and must be repaid. The size of the loan, the interest rate and the maturity or renewal date are stated under these terms. Debt securities include government and partnership bonds, certificates of deposit, and collateral.
When businesses or government agencies need money to do business, they can raise the capital they need by selling bonds. By buying bonds, also known as “fixed income securities”, the investor lends a certain amount of money to an institution for a certain period of time and receives a fixed interest (monthly or annual) from that institution as a fixed income. The bonds have a maturity date. When the bonds mature, the institution that received the investors’ money repays the principal.
In general, bondholders regularly receive interest, principal repayments, and other specified contractual rights (excluding voting rights). These bonds are issued for a certain period of time and are eventually repurchased by the issuer or “issuer”. A issuer is a legal entity that issues securities in its own name.
“Combined securities”, as its name implies, have some of the characteristics of debt and stock together. Composite papers are divided into three main categories:
- Guaranteed shares: An optional contract issued by the company gives shareholders the right to purchase shares at a specified time and price.
- Preferred stock: The share of companies in which interest, dividends or other capital returns are preferred.
- Convertible papers: Bonds that can be converted into shares of the issuing company in the stock market.
Investing in securities
The institution that produces and sells securities is called the “issuer” and those who buy these securities are called investors.
In general, securities represent an investment and a means by which institutions, companies, and other businesses can raise capital. Companies can raise a lot of capital by offering their shares to the public through an initial public offering (IPO).
For example, officials in a city, state, or country can raise funds needed for a project by issuing city bonds. Depending on the market demand or the pricing structure of an institution, raising capital through the supply of securities may be a better option than securing credit through a bank loan.
On the other hand, buying these bonds with borrowed money, also known as “leverage collateral”, is a popular way to invest. In principle, a company may transfer its property rights in the form of cash or other types of securities to individuals to settle its debts or other liabilities to other entities. This type of collateral arrangement has recently increased among institutional investors.
How are securities traded?
Publicly traded securities are listed on the Exchange. A stock exchange is an organized and self-regulating market in which securities are traded by brokers or traders in accordance with regulations.
Publishers can attract traders to their stocks by reassuring traders about legislation and providing liquidity. In recent years, informal e-commerce systems have become more common, with traders trading online instead of paperly.
As mentioned, the first major sale of a company’s stock on the stock exchange is called an “initial public offering” (IPO). The market in which a stock is first listed and offered is called the “primary market”.
During the initial public offering, the issuer is the seller of the stock and the investor or trader is the stock trader. But after the end of the initial public offering, the stock enters secondary trading in which the shares are transferred from one trader or investor to another trader solely as an asset. The market in which secondary trading takes place is called the “secondary market”. Shareholders can sell their shares to other investors for cash or capital gains, thus, the secondary market complements the primary market.
Securities may be offered privately to a limited group of eligible individuals. From time to time, companies’ shares are offered as a combination of public and private offering.
Other types of securities
اCertified securities They are presented in physics and on paper. These papers may also be stored in the direct registration system. In other words, a registrar on behalf of the company retains the company’s stock without the need for a physical certificate.
Modern technologies and policies have eliminated the need for certified securities. A system has now been developed in which issuers can deposit a single global certificate on behalf of all reputable securities into an international trust fund called the Depository Trust (DTC). All securities traded on the DTC are electronic. It is worth noting that certified and uncertified securities make no difference in terms of the rights and privileges of the shareholder and the issuer.
Carrier securities Negotiable securities are said to give the shareholder the rights to the securities. These securities are transferred from one investor to another under special circumstances. Carriers that existed before securities became electronic were always separate in nature; That is, each security represented a separate asset and was legally different from other securities. These securities are tradable in most cases, but not in rare cases. This means that by borrowing, the borrower can repay the asset itself or another similar asset that is equivalent to the original asset at the time of repayment. In some cases, carrier securities may be used to circumvent taxes. For this reason, publishers, shareholders and legislators do not have a positive view of these securities. Therefore, the use of these bonds is rare in the United States.
Registered securities It is said that the name of the shareholder and other necessary details are recorded by the issuer in a general ledger. Any transaction of these securities shall be subject to the necessary amendments being recorded in the General Office.
In the United States, the United States Securities and Exchange Commission (SEC) regulates the public offering and sale of these securities.
But in Iran, this task has been assigned to the Supreme Council of Stock Exchanges and Securities and Exchange Organization. According to Rules of the papers, Approved by the Islamic Consultative Assembly in 2005, the definition of these two institutions is as follows:
The “council” is the highest pillar of the market that approves the macro policies of that market. The members of the council are as follows:
- Minister of Economic Affairs and Finance
- Minister of Commerce
- Governor of the Central Bank of the Islamic Republic of Iran
- Presidents of the Iranian Chamber of Commerce, Industries and Mines and the Chamber of Cooperation
- The head of the “organization” who will also serve as the secretary of the council and the spokesman of the organization
- Attorney General or his deputy
- One representative from the centers
- Three financial experts exclusively from the private sector in consultation with professional securities market organizations on the proposal of the Minister of Economic Affairs and Finance and the approval of the Cabinet
- An expert exclusively from the private sector on the proposal of the relevant minister and the approval of the Council of Ministers for each commodity exchange
The “Exchange Organization” is a public non-governmental organization that has an independent legal and financial personality and is governed by the fees received and a share of the companies’ right to be admitted to the stock exchange and other income.
For detailed information on stock market definitions and rules in Iran, you can visit the website of the Exchange Organization. See.