Best Investments: Types Of Investment: Securities

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What are securities?

Securities are formal investment instruments that are negotiable and fungible.

But what does that actually mean?

You are aware that securities form the bedrock of a balanced investment portfolio. This is a fundamental of a good investment strategy. And they are so because they are secure, or at least as secure as you are going to get. There is no such thing as a no risk investment.

So, securities are secure.

But there is another element to securities.

Securities are secured against an asset.

That means you have evidence (paper form or electronic form) of ownership.

Below is a list of the main types of traded investment vehicles available to the individual investor.

Securities can be classified as follows:

• Equities (shares [UK] / common stock [US])
  Represents part ownership of a company.
• Collective investment schemes
  Represents the pooling of client money in a fund invested in underlying assets
• Debt instruments
  Representing evidence for borrowed funds.
• Derivative contracts
  Representing potential ownership.

The commonest form of a security is an equity.

This is common stock (US) or shares (UK).

I prefer to call them shares, because this best describes this type of security.

With these types of investment you are purchasing a share of a company: you then own part (a share) of that company.

You will be sharing in the growth and wealth (or failure) of the company. And you will be sharing this with every other owner of shares in the company.

The company you invest in could invest in other companies as its business strategy. These are known as closed-end companies. By owning equity in a closed-end company you are effectively owning a share of each company that business invests in. A good way to diversify and to reduce risk.

As well as closed-ended investment companies there are also open-ended investment companies.

These are considered to be collective investment schemes.

Instead of investing in the equity of a closed-ended company, giving you a share in the performance of the underlying securities, you purchase units in an open-ended investment company.

By purchasing units you are investing in the performance of the open-ended company. Performance can be enhanced by gearing. Collective investment schemes can borrow money to enhance performance through gearing. But with gearing comes an additional element of risk which is not present in a closed-ended investment company.

Basically you are pooling your money with other investors to obtain access to a broader range of investments.

The commonest form of debt instrument is a bond. 

A bond is a contract to pay back borrowed money at the end of a set period, paying interest at a fixed rate, and at fixed intervals, whilst the money is still owed.

Bonds can be company or Government bonds. The rate of interest received is dependent on the risk perceived. A Government bond is likely to have a lower rate of interest payable than one from a company, for a bond with the same par value and maturity date.

Options

Options represent contracts for potential ownership of equities or other assets.

These are .

This means it derives from an actual physical security. With an option you are contracting to take ownership of the asset for a set price, and you are paying for the privilege. The option is transferable. You can sell it on to another investor who sees potential profit between the current option price and the price of the option in the future.

Futures

Futures are contracts to buy or sell investments at a specified future date.

These are also derivative financial instruments.

A futures contract can be for commodities, movements in stock indices, movements in currency rates, and various other financial instruments. Futures are used to hedge - that is to hedge your bets that the movement in price of the investment will reflect a gain or loss against its current price. 

In future articles each of these groups of security investment will be expanded upon.

The best investments for a structured, balanced investment portfolio are securities. Securities types can be classified as: equities, collective investment schemes, debt instruments, and derivative contracts. Each of these types of investment support diversification and the narrowing of risk parameters, and as such are the best investments for the investment beginner to purchase.