Stocks vs Securities

Investments come in a variety of forms. Some investments carry high risks and high rewards. Others hedge against inflation. Finally, some investments are safer, offering less reward but a consistent return for the investor. 

Now, due to an increase in online brokers, everyone has the ability to invest in different types of securities, such as stocks, bonds and derivatives. 

This article takes you through what a stock is, what a security is and the benefits of each. 

What is a Stock?

A stock is the total amount of shares of a company, with each share representing a portion of ownership of the company. If you own 1 or more shares of a company, it means you are entitled to part of its profits (if it makes any) during a specified period.

The share of profits is usually paid via a dividend. For example, in its latest 2nd-quarter earnings report, Target (NYSE: TGT) declared that it would pay a dividend of $0.09 per share. It means that an investor who owns 1,000 shares in the company will receive a payout of $90. 

A stock, as a tradable financial asset, is recognized as a type of security. 

What is a Security?

A security is considered any type of financial asset that you can trade. It is a wide-ranging description and encompasses investments such as stocks, bonds, options, futures, preferred stocks and Certificates of Deposit (CDs). Securities can apply to both private and public markets.

There are 4 different types of securities. 

1. Equity Securities: Equity securities represent ownership in a company. Stocks are included in the equity category. Equity securities are considered riskier investments, and the risk can heighten depending on the shares you buy. However, they also have the possibility for greater returns. For example, if you purchase shares of a company and they rise considerably, then you could see a significant return. But, if the value plunges, then you could lose a considerable sum. When owning a stock, bankruptcy of the company is also a risk to consider. 
2. Derivative Securities: Derivative securities are defined as financial instruments whose value is based upon the value of another asset. The asset itself could be a commodity, stock, currency, property or other asset. Examples of derivative securities include futures contracts, options, swaps, mortgage-backed securities and forward contracts. For example, an options contract gives the investor the right to buy or sell an asset at a specific price on a specified date. Therefore, the value of the contract is determined by the price of the asset being bought or sold. 
3. Debt Securities: Debt securities are securities whereby the owner is entitled to a consistent return of interest payments where 1 party loans money to another. For example, a debt security could be government bonds, corporate bonds, municipal bonds or a CD. Debt securities define the amount loaned, the interest repayments and the maturity date. The organization receiving the loan must pay back the loan in full with interest. 
4. Hybrid Securities: Hybrid securities are securities that include the characteristics of 2 other groups of securities, debt and equity. Hybrid securities usually pay increased interest at either a fixed or floating rate. 

Who Benefits from Stock Investments?

Investing in stocks does not only benefit the investor (if it goes in their favor). Other entities profit from the transaction as well. 

The investor/trader who buys the stock has the most significant potential benefit. If the stock price goes in their favor, they profit, and depending on how long they hold and how high the price goes, they could benefit significantly. They also have the potential advantage of dividend payments.

The broker is another beneficiary of stock investments. It takes a commission from each stock transaction (although a lot of brokers now charge zero commission fees), but it may also charge a spread and other fees. Therefore, before choosing a broker, it is essential to analyze the different charges it levies as it could impact your potential profits. 

The company whose shares you are buying can also benefit, although its profit depends on the amount of buying volume at the time. If enough people and enough money are invested in a company’s shares, its stock price increases. The stock price rising could also indicate that the company is becoming profitable or increasing current profits. Executives within the organization may then hold their current positions or add to them.

Who Benefits from Security Investments?

An investor stands to benefit from investing in securities if the value of the security moves in their favor or they receive a yield from the asset. Alternatively, if you invest in non-yielding securities and the price declines, you also stand to lose money. 

If you make the investment via a broker, it also benefits. Brokers generally charge brokerage fees and a commission when you open an account and make an investment.

Bonds can be purchased directly from the government or on the primary market, so the seller (the government or company) benefits directly from the investment. Companies or governments issue bonds as a way of raising money. 

Are Stocks Volatile Investments?

In the general sense, stocks are considered more volatile investments than other types of securities. However, some stocks exhibit more volatility than others. 

Volatility in the stock market is often expected. Depending on sentiment, current news and various other factors, a stock may be highly volatile for a week or for a few days and then less volatile later, depending on the reason for the volatility. 

An example of extreme volatility in a stock would be SPI Energy (NASDAQ: SPI) in September 2020. On September 23, the company announced a new electric vehicle subsidiary and closed over 1,200% above the previous day’s close after initially climbing over 1,400%. While this stock is an extreme example, news can cause highly volatile stocks, making them a riskier investment than other securities. 

Are Securities Stable Investments?

Other types of securities are considered more stable than stocks. For example, bonds tend to be more stable investments. Individual bonds, especially those issued by governments, are seen as more secure and provide a steady return through interest payments. The returns for individual bonds (as opposed to bond funds), while not as big as potential stock returns, are guaranteed. 

While bonds are safer than stocks, they, like all other investments, do carry risks as well. For example, interest rates have an inverse relationship with bonds. As a result, bond prices will typically fall when rates rise. Additionally, a corporation that issues a bond can go bankrupt.

Best Online Stock Brokers

Regardless of the security type you wish to invest in, you will more than likely need a broker to carry out the transaction. Different brokers may provide access to different markets, so you must choose the broker that suits your needs. It is also vital you understand the various characteristics of the broker, such as fees, markets available and the customer service they provide. Below is a list of Benzinga’s best online brokers.

All Investments Carry Risk

While each security type yields different benefits, it is crucial to understand that any investment carries some type of risk. Stock investments may be riskier than other security types from volatility, but the potential payoff can be a lot larger if you make the right decisions and invest at the right time.

As an investor or trader, it is your job to assess the risks, make sure the reward outweighs the risk, confirm that the odds are in your favor and capitalize on the potential return. Above all, research is key.

Frequently Asked Questions