Securities and Their Effect on the U.S.

Economy

BY KIMBERLY AMADEO, Updated January 10, 2018

Securities are investments traded on a secondary market. The most well-known

examples include stocks and bonds. Securities allow you to own the underlying asset
without taking possession.

For this reason, securities are readily traded. That means they’re liquid. They are
easy to price, and so are excellent indicators of the underlying value of the assets.

Traders must be licensed to buy and sell securities to assure they are trained to
follow the laws set by the Securities and Exchange Commission.

The invention of securities created the colossal success of the financial markets.

There Are Three Types of Securities

1. Equity securities are shares of a corporation. You can buy stocks of a company
through a broker. You can also purchase shares of a mutual fund that selects
the stocks for you. The secondary market for equity derivatives is the stock market.
It includes the New York Stock Exchange, the NASDAQ, and BATS.

An initial public offering is when companies sell stock for the first time. Investment
banks, like Goldman Sachs or Morgan Stanley, sell these directly to qualified
buyers. IPOs are an expensive investment option. These companies sell them in
bulk quantities. Once they hit the stock market, their price typically goes up. But you
can't cash in until a certain amount of time has passed. By then, the stock price might
have fallen below the initial offering.
2. Debt securities are loans, called bonds, made to a company or a country.

You can buy bonds from a broker. You can also purchase mutual funds of selected
bonds.

Rating companies evaluate how likely it is the bond will be repaid. These firms
include Standard & Poor's, Moody's, and Fitch's. To ensure a successful bond sale,
borrowers must pay higher interest rates if their rating is below AAA.

If the scores are very low, they are known as junk bonds. Despite their risk, investors
buy junk bonds because they offer the highest interest rates.

Corporate bonds are loans to a company. If the bonds are to a country, they are
known as sovereign debt. The U.S. government issues Treasury bonds. Because
these are the safest bonds, Treasury yields are the benchmark for all other interest
rates. In April 2011, when Standard & Poor's cut its outlook on the U.S.
debt, the Dow dropped 200 points. That's how significant Treasury bond rates are to
the U.S. economy.

3. Derivative securities are based upon the value of underlying stocks, bonds or
other assets. They allow traders to get a higher return than buying the asset itself.

Stock options allow you to trade in stocks without buying them upfront. For a small
fee, you can purchase a call option to buy the stock at a specific date at a certain
price. If the stock price goes up, you exercise your option and buy the stock at your
lower negotiated price. You can either hold onto it or immediately resell it for the
higher actual price.

A put option gives you the right to sell the stock at on a certain date at an agreed-
upon price. If the stock price is lower that day, you buy it and make a profit by selling
it at the agreed-upon, higher price.