Securities VS Stock: If you want to know the difference between stocks and securities. Let’s talk about them. When you are starting in the trading environment you will see a lot of different terms or trading lingo. A lot of different ways to approach something and many points of view. Keep on reading if you want to know what exactly are securities?
That’s why I’m always simplifying day trading for you.
In this post, I’m going to break down everything you need to know about securities and stock markets. Because there is a bit of confusion around it. Let’s start with the basics
The definition of a security will depend on where do you live in. Yeah, some countries have a slightly different definition.
For example. In the US the definition of security can resume to any financial asset that can be traded is a security. While in other countries they may refer to specifics financial assets. This is a what are securities in finance.
But, what that actually means? How do securities work? To put it simply, there’s an entity called the Issuer. This entity can be anything like a company or even a city. When they need capital, the issuer releases a security that investors like us can buy.
Knowing that, you can assume that the stock market is a security. But don’t worry this will look cleaner when we talk about the types of securities.
There’s a bunch of securities, that’s true. But they can be broadly categorized into three major and most popular types.
So, what is equity securities? It’s an instrument that gives you an ownership position in a company. That’s called equity. This represents a part of their assets and profits in a proportional share of the corporation. There are some categories inside the equity securities. But we’ll leave that for another post.
A good example of this is the Stock Market.
As the word “debt” suggests. This type of security means that governments and corporation can raise their capital to operate. They can do this by releasing a publicly-traded loans.
There are a few types of debt securities, such as popular bonds, notes, and debt instruments.
Debt securities work differently than equity securities. Here the investors can be called “creditors”. Yeah, you’re lending money to the issuer. You buy debt loans for a fixed period of time. At the end of the loan period called maturity, the issuer will pay the principal balance + interest.
You must be wondering by now what are derivatives securities. I will put this one into simple words too. Financial derivatives are contracts that their value is based on something else. Any security that their value can be determined or derivate from the value of another asset.
We got the underlying values which are bond, stocks, etc, and the value derivative. When the price of one change then the price of the other one change too.
Pretty broad, right? There are two major uses of derivatives securities. Hedge risk and speculations. Both are pretty different, the first one seeks to stay safe and reduce risk and the second one is seeking profit.
There are 4 types of derivatives securities. They are Futures, Options, Forwards, and Swaps.
Now we can talk about what is a stock
The Stock Market is a type of security, yeah, and it’s an equity security. Now is easier, right?
It’s a global network of exchanges where large sums of money move every day. You will not trade for goods or services, as we say up there in the post, you will be trading securities. They are called equity.
This is where everything sums up. We got the company that needs capital to operate, and we got the investors. The company goes public and sells a part of its assets. But they need a place to sell it and this is where the stock market comes in. Offering a place for investors and companies to do their job.
Shares can be traded all over the world. In the US you can fin the NYSE, NASDAQ, and some others. The TSX in Canada and NSE in India and the JPX in Japan. This allows the financial growth and expansion of the companies.
For example Facebook at its initial state they released an IPO (Initial public offering). Sold over 420million shares of the company at $38 dollars each. This means Facebook earned $16 billion dollars from investors.
This is beneficial for the investors too. If the company grows and expands, the shares for investors will do the same.
But what happens when the shares get too pricey, big, and expensive?
Well the stock market split the shares into pieces. For example, if you have a company and in your IPO you sell 100 shares at $100 each. But your company continues to grow and expand so much that the share prices go up to $400 and the average investor can’t buy your shares. You’ll have to do a 1-2 split. Meaning that you’ll now have 200 shares, also the price of the shares split by 2.
Now your share is more accessible to the average investors, and you can continue to grow and expand. The old investors that bought, for example, 5 shares of your company now have 10, but the value is still the same.
Yes, they are. Stocks are equity security.
That’s just a name given because they are secure contracts that are tradable in the financial markets.
You should have noticed by now that there’s no such a thing as “vs” here. Stocks are a type of security and that’s it. The same goes for bonds and all the other ones.
Now you know more about securities and equity securities. What are you waiting for to start your trading journey?