What are financial securities?
Financial securities can be termed as financial instruments representing company ownership or an asset claim. There are multiple types of financial securities in the form of stocks, bonds, mutual funds, and other types of investments. These financial securities are bought and sold on various financial markets. Both individuals and institutions can utilize them to generate income, accumulate capital, or speculate for future market movements.
Financial securities as an asset enables businesses to have a healthy balance sheet and also leverage them to raise capital and fund their operations.
A vast majority of businesses and enterprises use financial securities for borrowings. When this activity happens online, it could be termed as loan against securities online. Some examples of such instruments could be Bill of Lading, credit notes etc.
Similar to the use of financial securities, borrowings could also be obtained against other instruments like mutual funds, shares and stocks. A significant number of such applications are processed online because of which they could also be called instant loan against mutual funds or digital loan against shares.
What are the different types of financial securities?
There are various types of financial securities available to investors. Each type of security has its own set of risks and rewards, loan against securities, and investors should carefully consider their investment goals and risk tolerance before investing. Given below are a few types of financial securities:
1. Bonds as financial security
What are bonds?
When purchasing a bond, an investor provides a loan to either a government or corporation in exchange for regular interest payments and the repayment of the initial investment when the bond reaches maturity.
Types of bonds
- Treasury bonds
Treasury bonds, also called T-Bills at times, are issued by the Govt of India and is a money market instrument. These are typically issued for 3 months, 6 months and 1 year periods. A treasury bond can be used as an instrument to borrow for short terms only.
- Municipal bonds
These are bonds floated by local self governing bodies like a municipality, and are also known as muni bonds. SEBI governs the issuance and operation of these bonds because of which they are safe and secure. Most of these bonds are floated to raise capital for public works like road development and other infrastructure.
- Corporate bonds
In India, corporate bonds are classified as debt securities. This is because buying of a corporate bend is equal to lending money to the entity which has floated them. Corporate bonds always pay out an interest to its buyers. These could also become an instrument against which borrowings could be undertaken by a business or an entity who are in possession of the bonds.
Be it banks or NBFCs – a bond is always looked at as a safe collateral against which they can lend. These are financial securities or financial instruments which are considered a safety net.
What are the advantages of bonds?
Given below are the main advantages of bonds as financial securities.
- Bonds provide a relatively stable source of income.
- The interest rate and bond payments are usually fixed, and the principal is returned when the bond matures. This helps investors who are looking out for a predictable source of income.
- Bonds are considered less risky than stocks, which can be a useful way to diversify an investment portfolio.
What are the disadvantages of bonds?
- Value of a bond can fluctuate, especially if the interest rate changes. The value of existing bonds falls when the interest rates go up.
- The issuer’s creditworthiness is an important factor to consider when investing in bonds.
- The bond’s maturity date should also be considered, as the bond may be worth less when it matures.
It’s important to note that bonds are not risk-free investments; even if they are considered less risky than stocks, investors should consider their investment goals, risk tolerance, and the issuer’s creditworthiness before investing in bonds.
Stocks as financial security
What are stocks?
Stocks are also known as equities and represent ownership in a company. You are technically buying a small piece of the company in return for a share of the company’s profits. Stocks are bought and sold on various stock exchanges. A loan against stocks or loan against equity shares is a great option to get some money when in need.
Types of stocks
There are two main types of stocks:
- Common stocks
Common stocks represent ownership in a company and give shareholders the right to vote on company issues, such as the election of the board of directors.
- Preferred stocks
Preferred stocks typically do not have voting rights, but they have a higher claim on the company’s assets and earnings than common shareholders.
What are the advantages of stocks?
- One of the primary advantages of investing in stocks is the potential for high returns.
- Owning stocks in a company allows investors to participate in the company’s growth, which can lead to significant capital appreciation.
- Stocks also provide liquidity, meaning they can be easily bought and sold on stock exchanges.
What are the disadvantages of stocks?
- The value of stocks can be affected by a wide range of factors, such as changes in the economy, company-specific events, and changes in the broader market.
- Additionally, stocks can be quite volatile; their value can fluctuate significantly over shorter periods. This can be unsettling for investors who need more preparation for short-term fluctuations.
- Investing in a single stock can also be risky, as the performance of a single company can be affected by many factors. A diversified portfolio of stocks can help mitigate this risk.
It’s important to note that investing in stocks is not suitable for all investors. Like mutual funds, investments in stocks and shares are also subject to market risks and should be carefully analyzed..
Mutual Funds as financial security
What are mutual funds?
A mutual fund is a financial security that pools money from many investors to buy a diversified portfolio of stocks, bonds, and other securities. Investors in a mutual fund own shares of the fund and their shares’ value are based on the fund’s net asset value (NAV).
Types of mutual funds
There are various types of mutual funds:
- Index funds
Also known as exchange traded fund (ETF), an index funds work according to a pre-ordained template of rules and conditions of the particular basket of funds / industry segment they belong to. An index fund gives an investor the ability to have a far more diverse portfolio than being locked up on a particular company’s shares or stocks. Index funds aim to replicate the performance and growth of a specific market index.
- Actively managed funds
When a single fund manager or a group of fund managers monitor a fund and take instantaneous decisions to gain performance which is above that of the market, the fund is said to be an actively managed fund.
One of the advantages of an actively managed fund is that they do not have to follow a specific index and can decide to sell / buy / hold depending on their own risk perception.
- Sector funds
Equity funds that concentrate on a specific sector or a market of the economy are called sector or sectoral funds. These kind of funds open up a chance especially for retain investors to be a part of those sections of the economy which are either high performing or expected to perform and deliver high growth.
Advantages of mutual funds?
- By pooling money from multiple investors, mutual funds can provide access to a diversified portfolio of stocks, bonds, and other securities. This can reduce the risk of investing in a single security or a small number of securities.
- Additionally, mutual funds are managed by professional fund managers who have access to research and other resources that individual investors may not have, which can help to grow the performance of the fund.
- Loan against mutual fund interest rates is comparatively lower.
Disadvantages of mutual funds?
- Mutual funds charge management fees and other expenses, which can eat into returns.
- Additionally, actively managed funds may underperform their benchmark index, and the performance of a mutual fund can be affected by the performance of the securities it holds.
It’s important to note that mutual funds as an investment vehicle are not suitable for all. Additionally, investors should also consider the past performance of the fund and the experience and track record of the fund manager. It’s also important to diversify investments by investing in multiple funds with different strategies and sectors to reduce risk.
In conclusion, financial securities are a diverse range of financial instruments that represent ownership in a company or a claim on an underlying asset. They come in many forms, such as stocks, bonds, and mutual funds trusts.
Each type of security has its own set of risks and rewards, and it’s important for investors to consider their investment goals, risk tolerance, and the creditworthiness of the issuer before investing in them.
It’s also important to diversify investments by investing in multiple types of securities to reduce risk. With the right approach and understanding, financial securities can be a valuable tool to help investors reach their financial goals.
To know more and for expert financial guidance, connect with Abhiloans.