Editor's Note: Options are not suitable for all investors. Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Please see the Characteristics and Risks of Standardized Options.
A security can refer to a number of different types of assets, including stocks, bonds, Treasury notes, derivatives, and more. Securities are fungible and can be traded via public as well as private markets.
The three main types of securities, broadly speaking, include: equity securities, where the investor owns a share in an organization; debt securities, where the investor loans capital and earns interest, and derivatives, which are contracts based on the value of an underlying asset.
Securities trading is regulated by the Securities and Exchange Commission, or SEC.
Key Points
• Securities is a broad term that refers to tradable financial instruments, including stocks, bonds, and derivatives.
• Equity securities represent ownership in a company, while debt securities (bonds) function as loans, where borrowers pay interest to lenders.
• Derivatives, such as futures and options, are higher-risk investments linked to underlying assets. These appeal mainly to experienced investors due to their complexity.
• Trading securities typically occurs on regulated exchanges, with investors using brokerage or retirement accounts to engage in buying and selling activities.
What is a Security?
A security is a tradable type of investment that traders can buy and sell on financial exchanges or other platforms, whether investing online or through a traditional brokerage. Securities have monetary value; buyers and sellers determine their value when trading them.
Securities include different types of asset classes. In general, investors earn money by buying securities at a low price and selling them at a higher one, but there are a range of investing strategies that can include profiting when the price of a security drops, as well as other means.
Here are some common security categories.
Equity Securities
These include stocks and
Individual stocks may also pay dividends to investors who own them.
Debt Securities
This group includes bonds and other fixed-income vehicles, where lenders borrow money from investors and pay interest via periodic payments on the investment principal (also called the yield).
Investors can buy bonds from a variety of bond issuers, including: states, local and municipal governments, companies, and banks and other financial institutions. Typically, debt securities pay investors a specific interest rate paid usually twice per year until a maturity date, when the bond expires.
Some common debt securities include:
• Treasury bills. Issued by the U.S. government, T-Bills are considered among the safest securities.
• Corporate bonds. These are bonds issued by companies to raise money without going to the equity markets.
• Bond funds. These types of mutual funds allow investors to get exposure to the bond market without buying individual bonds.
Derivatives
This group of securities includes higher-risk investments like options trading and futures which offer investors a higher rate of return but at a higher level of risk.
Derivatives are based on underlying assets, and it’s the performance of those assets that drive derivative security investment returns.
For example, an investor can buy a call option based on 100 shares of ABC stock, at a specific price and at a specific time before the option contract expires. If ABC stock declines during that contract period, the call option buyer has the right to buy the stock at a reduced rate, thus locking in gains when the stock price rises again.
Derivatives allow investors to place higher-risk bets on stocks, bonds, and commodities like oil or gold, and currencies. Typically, institutional investors, such as pension funds or hedge funds, are more active in the derivative market than individual investors.
Hybrid Securities
A hybrid security combines two or more distinct investment securities into one security. For example, a convertible bond is a debt security, due to its fixed income component, but also has characteristics of a stock, since it’s convertible.
Hybrid securities sometimes act like debt securities, as when they provide investors with a floating or fixed rate of return, as bonds normally do. Hybrid securities, however, may also pay dividends like stocks and offer unique tax advantages of both stocks and bonds.
How Security Trading Works
Securities often trade on public exchanges where investors can buy or sell securities with the goal of making a financial profit.
Stocks, for example, are listed on global stock exchanges and investors can purchase them during market trading hours. Exchanges are highly regulated and expected to comply with strict fair-trading mandates. For example, U.S.-based stock exchanges like the New York Stock Exchange (NYSE) or Nasdaq must adhere to the rules and regulations laid out by Congress and enforced by the U.S. Securities and Exchange Commission (SEC).
Each country has their own rules and regulations for fair and compliant securities trading, including oversight of stocks, bonds, derivatives, and other investment vehicles. Debt instruments, like bonds, usually trade on secondary markets while stocks and derivatives are traded on stock exchanges.
There are many ways for investors to engage in security trading. A few of the most common ones include:
Brokerage Accounts
Once an investor opens a brokerage account with a credentialed investment firm, they can start trading securities.
All a stock or bond investor has to do is fill out the required forms and deposit money to fund their investments. Investors looking to invest in higher-risk derivatives like options, futures, or currencies may have to fill out additional documentation proving their credentials as educated, experienced investors. They may also have to make larger cash deposits, as trading in derivatives is more complex and has more potential for risk.
Some qualified investors with a certain type of brokerage account can engage in margin trading, meaning that they trade securities using money borrowed from the broker. This is a high-risk strategy suitable only for experienced investors; most brokerages have strict rules about who can trade on margin.
Retirement Accounts
By opening a retirement account, through work or a bank or brokerage account, investors can invest in a range of securities, including stocks, mutual and index funds, bonds and bond funds, and annuities.
The type of securities you have access to will depend on the type of retirement account that you have. Workplace plans such as 401(k)s typically have fewer investment choices (but higher limits for tax-advantaged contributions) than IRAs, or Individual Retirement Accounts.
Risks and Considerations
There is always the risk of loss when investing in securities. That said, some securities are riskier than others.
Risk vs. Reward
• Equities, or stocks, tend to be higher risk investments. Stock markets are known to be volatile and unpredictable. That said, stocks offer the potential for returns; the average historic return of the stock market is about 9% or 10% (or 6% to 7% after inflation).
• Bonds, by contrast, are lower risk, and provide lower but steady returns versus stocks.
• Derivatives, like options and futures trading, can be very high risk and these strategies are meant for experienced investors.
When choosing securities for an investment portfolio, it’s important to take into account the risk/reward profile of your investments, as well as whether your asset allocation reflects your risk tolerance. For example, if your portfolio is heavily weighted to stocks, that is likely to increase your risk exposure.
Types of Investments
Because many investors are less experienced at managing a portfolio for the long term, there are certain types of investments that can help investors to manage risk. This is especially true for those who are investing for retirement, and want to protect their savings while maximizing any potential growth. For example:
• Target-date funds are a type of mutual fund that are geared to be long-term investments, held until a target retirement date is reached. So a 2045 fund is designed to provide a balanced portfolio of securities for investors with a target retirement date in roughly 20 years.
The fund’s allocation of securities starts out more aggressive (tilted toward stocks), and automatically adjusts over time to become more conservative (tilted toward fixed income) to protect investors’ savings as they near retirement.
• Robo-advisors are automated portfolios that investors can select based on their personal goals, time horizon, and risk tolerance — the difference being that investors don’t select the securities in these portfolios. A robo portfolio is generally a pre-set mix of ETFs, and the allocation (or mix of securities) is determined by a sophisticated algorithm.
Because investors can’t change the securities themselves, this helps to prevent impulsive choices, and may mitigate risk over time.
Get Started With Securities Trading
To start trading securities, investors can set up a brokerage account or retirement account, and begin investing as they see fit.
Again, it’s best to start with the end in mind: Decide your investment goals, choose the amount you want to invest, do your due diligence in terms of researching various investment choices (bearing in mind risk levels and fees).
Once the account is funded, the investor can purchase a wide variety of securities in order to create an investment portfolio. Sometimes retirement account investment options can be more limited than a full-service brokerage account.
The Takeaway
There are many different types of securities that investors can purchase as part of their portfolio. Choosing which securities to invest in will depend on several factors, including your financial goals, current financial picture, and risk tolerance.
Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).
FAQ
What are the four main types of securities?
The four types of securities are: equity securities (such as stocks), debt securities (bonds and Treasuries), derivatives (higher-risk investments like options), and hybrid securities (such as convertible bonds).
What is a securities investment?
A securities investment is an investment in a security such as stocks, bonds, or derivatives. A security is a tradable type of investment that investors can buy and sell.
What’s the difference between securities and shares?
Stocks, also known as equity shares, are a type of security. The term “securities” refers to a range of different investments, one of which is stocks, or shares in a company.
Are securities an asset?
Yes, securities are a type of financial asset because they hold monetary value.
What are Treasury securities?
Treasuries are debt securities — e.g., bills, bonds, and notes — issued by the U.S. government. Treasuries are considered low risk because the U.S. has never defaulted on its debts.
Photo credit: iStock/paulaphoto
SoFi Invest®
SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.
Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at https://sofi.app.link/investchat. Please read the prospectus carefully prior to investing.
Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.
Mutual Funds (MFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or clicking the prospectus link on the fund's respective page at sofi.com. You may also contact customer service at: 1.855.456.7634. Please read the prospectus carefully prior to investing.Mutual Funds must be bought and sold at NAV (Net Asset Value); unless otherwise noted in the prospectus, trades are only done once per day after the markets close. Investment returns are subject to risk, include the risk of loss. Shares may be worth more or less their original value when redeemed. The diversification of a mutual fund will not protect against loss. A mutual fund may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.
*Borrow at 11%. Utilizing a margin loan is generally considered more appropriate for experienced investors as there are additional costs and risks associated. It is possible to lose more than your initial investment when using margin. Please see SoFi.com/wealth/assets/documents/brokerage-margin-disclosure-statement.pdf for detailed disclosure information.
Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.
SOIN-Q125-076