Types of securities: how to buy and how to get income

Securities are documents that confirm the property rights of their owner. They can be in paper or electronic form. Securities act as an investment instrument and allow to receive income from investments.

In general terms, a security is a document that certifies the property and non-property rights of its owner. This document receives legal force only if it is drawn up according to the approved sample and if all details are filled in.

Theessence of securities is that they give the right to receive income from investments or to participate in the management of the company. Specific rights and obligations of the owner of a security depend on its type.

When securities are bought or sold, the owner’s rights to a share of the total capital or payment of interest are transferred to the new owner. For issuing centres such an instrument is a convenient way to conduct financial activities, and for buyers – a promising option for investment. In this article we will tell you about the main types of securities on the stock market and the possibilities of obtaining income from their purchase.

Types of securities:

1. Shares – securities that entitle you to a share in the ownership and profits of a company. Owners of shares receive dividends – a part of the company’s profits.
2. Bonds – debt securities that confirm the owner’s right to receive a fixed income at a certain time.
3. Bills of exchange are securities that confirm the obligation of a debtor to pay a certain amount to a creditor within a certain period of time.
4. Options are types of securities that give their holder the right, but not the obligation, to buy or sell another type of asset (commodity, security) at a predetermined price within a certain period of time.
5. Cheques – documents that contain a written order of the cheque holder to the bank to pay a specified amount to the cheque holder.
6. Certificates of deposit and savings certificates – securities issued by banks that confirm the owner’s right to receive income on the deposit.
7. Bill of Lading – a document that confirms the ownership of the cargo and the carrier’s obligation to deliver the cargo to the destination point.
8. Mortgages – securities that confirm the right of the pledgee to receive performance under a monetary obligation secured by a mortgage, as well as to foreclose on the property pledged under this obligation.

These are only some of the types of securities. There are other, less common types.

About classification of securities

There are various ways to classify securities, as there is no single system. The main groups can be distinguished by several criteria:

• By term of validity – a distinction is made between fixed-term and open-ended. For example, a bond may have a limited period of circulation, while a share exists throughout the entire existence of the issuer.
• By the form of issue – securities are divided into issuance and non-issuance, as well as into documentary and non-documentary. Non-issue securities do not create new rights, but only confirm the existing ones. The transfer of rights under a certificated security is carried out through the transfer of the document itself, while uncertificated securities are fixed in the register of owners.
• By liquidity – market and non-market. Marketable securities include securities available for trading on the stock exchange (e.g., stocks and bonds). Non-market assets, such as certificates, bills of exchange and cheques, cannot be freely traded on the stock market.
• By type of securities – a distinction is made between basic and derivative securities. Prime examples are stocks, bonds and bills of exchange. Derivative securities include futures and options.
• By the method of confirmation of rights – registered, warrant and bearer. The owner’s name is shown on registered and warrant securities; a warrant can be transferred to another person.

Equity securities: classification and characteristics

The definition of the term ‘equity security’ is contained in the articles of the Federal Law of the Russian Federation ‘On the Securities Market’. This financial instrument has three main characteristics:

• the document confirms the right to own an asset or receive income
• it is placed on stock markets in the form of issues
• all securities within one issue have the same volume and maturity date

The first characteristic applies to all types of documents, while the second and third are specific only to equity securities. Through the use of such instruments, issuing companies attract investors and obtain financial resources.

Regulation of the process of issuance and circulation of securities in Russia is carried out by the following legislative acts:

• Civil Code of the Russian Federation, Chapter 7 ‘Securities’
• Federal Law No. 208-FZ ‘On Joint Stock Companies’
• Federal Law No. 39-FZ ‘On the Securities Market’

In accordance with Russian legislation, equity securities include:

• Shares. This is one of the most common stock instruments, which confirms ownership of a share in an organisation. Shares are subdivided into ordinary and preference shares. Common shares provide voting rights on important issues but do not guarantee high dividends. Preference shares provide shareholders with the right to receive a share of the company’s profits. Investors are interested in the price of the asset and the level of dividends, while speculators are interested in the possibility of making money in a volatile market.
• Bonds. These debt securities confirm the issuer’s obligations to their owner. Bond holders do not participate in the distribution of the company’s profits, but receive interest payments – coupons. In case of bankruptcy of the issuer, payments on bonds are made first, which reduces risks compared to shares. Government bonds are considered the safest. Investors can recover their funds by selling bonds on the stock market. Bond prices do not fluctuate much, so they are more often considered as an investment rather than a speculative instrument.
• Issuer options. These derivative securities provide the right to purchase shares at specified times or upon the occurrence of certain conditions, and the value is fixed in advance in the contract.Different types of equity securities have unique characteristics. However, one common aspect that unites them is the procedure to be followed by the issuer when issuing them.

Securities issue

is a procedure established by law for issuing securities by the issuer in order to attract additional financial resources. Issuance includes several stages:

1. Adoption of the decision to issue. The issuer makes a decision to issue securities, determines their type, volume, terms and conditions of placement.
2. Preparation of the issue prospectus. If securities are placed by public subscription or among an unlimited number of persons, it is necessary to prepare a prospectus. It contains information about the issuer, securities and risks associated with their acquisition.
3. State registration of the issue. The issuer must register the issue of securities with the relevant state authority. For this purpose it is necessary to submit an application and documents stipulated by the legislation.
4. Placement of securities. The issuer places securities among investors. This may be an open subscription (placement among an unlimited number of persons) or a closed subscription (placement among a predetermined number of persons).
5. State registration of the report on the results of the issue. After the placement of securities, the issuer must submit a report on the results of the issue to the state body that registered the issue.
6. Information disclosure. The issuer is obliged to disclose information on its activities and issued securities in accordance with the legislation.

It is important to note that the issuance of securities is regulated by law and requires compliance with certain rules and procedures. Violation of these rules may result in liability, up to and including criminal liability.

Acquisition of securities

You do not need a significant amount of money to start trading on the stock market. The first step is to open a brokerage account.

The process of buying stocks and bonds is quite intuitive. The investor first deposits a set amount of money into the account and then searches the securities catalogue for suitable options in terms of price. After selecting the desired asset from the list, he sends a request to his broker. The broker acts as an intermediary on the stock exchange, buying stocks or bonds on behalf of the client for an agreed amount. The broker is also responsible for withholding tax payments.

In order to receive tax benefits, it is possible to open an individual investment account (IIA) and make purchases on this account. The process of purchasing securities will remain similar to what happens with a brokerage account.

How to buy securities:

1. Choose a trusted broker or management company.
2. Open a brokerage account or an individual investment account (IIA).
3. Deposit the required amount into the account.
4. Select securities to buy.
5. Place a purchase order.

It is important to remember that buying securities involves risks and you should carefully research information about the issuing company and its securities before making a purchase decision.

How to get income from a security:

1. Dividends on stocks – a portion of a company’s profits that is paid to stockholders.
2. Interest payments on bonds – a fixed income that is paid to bondholders at certain times.
3. Security appreciation – an increase in the value of a security that allows you to make a profit when you sell it.

There are several ways to make money from investments in securities, among which are investing and trading.

Investing is generally considered a lower risk option. The investor analyses the market, assesses the potential threats and dividends of different stocks. As a rule, the investment strategy is oriented towards a stable income over several years. When choosing stocks, it is important to consider the type of issuer, the minimum dividends (for preferred stocks) and other conditions.

When purchasing bonds, the main profit is derived from coupon payments. In some cases, bonds can be more profitable than stocks, even if dividends are taken into account. When a bond is redeemed, its owner receives a guaranteed nominal value, while shares may lose value. In addition, if the issuer goes bankrupt, debt payments are among the first to be made.

Trading is an alternative to investing. This process involves actively trading stocks in order to profit from the difference between the buy and sell prices. There are many trading strategies, but they all carry high risks. The trader’s profit does not depend on the amount of income in the form of coupons or dividends, but is determined by the ability to predict price fluctuations. In periods of economic crises, the value of shares of promising companies can significantly decrease, but then quickly recover to previous levels.
The choice of income generation method depends on the amount of investment capital, strategic intentions and the current situation on the stock market.

Attention! It is important to remember that the return on securities can be both positive and negative, and it is necessary to carefully analyse the market and choose securities taking into account risks and potential returns.