Securities vs Stocks
An individual wishing to invest his excess funds may select between a number of financial assets in which to invest in. These financial instruments are of different types, characteristics, maturities, risk and return levels. The article below shows a clear picture of what it meant by ‘stocks’, and how they belong to, but different from other types of ‘securities’. It must be noted that stocks and securities are easily confused to be the same thing, even though, they represent quite different forms of financial assets. As stocks refers to a capital or equity investment made in a firm, the term ‘securities’ is used to refer to a much broader class of financial instruments.
Stocks are parts of capital investments made by an investor in a publicly traded firm. The investor who purchases the stocks are known as a shareholder/stock holder, and is entitled to receive dividend, voting rights, and capital gains, depending on the type of shareholding and the performance of the company and its shares in the stock market. Stocks and shares refer to the same instrument and these financial assets are usually traded on organized stock exchanges around the world such the New York Stock Exchange, the London Stock Exchange, The Tokyo Stock Exchange, etc. There are 2 types of stock known as common stock or preferred stock. Common or ordinary stock carries voting rights with higher control given to shareholders in business decisions. However, unlike preference shareholders, ordinary shareholders are not entitled always to receive dividend, and dividend may only be received when the business performs well.
Securities refer to a broader set of financial assets such as bank notes, bonds, stocks, futures, forwards, options, swaps, etc. These securities are divided into different types depending on their distinguishing characteristics. Debt securities such as bonds, debentures, and bank notes are used as forms of obtaining credit and entitle the holder of the debt security (the lender) to receive principal and interest payments. Stocks and shares are equity securities and represent an ownership interest in the firm’s assets. The shareholder of the company can trade his shares on the stock exchange at any time. The return to the shareholder of tying up funds in shares is the income from dividends or capital gains in selling the share at a higher price than what it was bought for. Derivatives such as futures, forward, and options are the third type of security, and represent a contract or agreement made between two parties, to perform a specific action or fulfill a promise at a future date. For example, a futures contract is a promise to buy or sell an asset a future date at an agreed upon price.
Securities vs Stocks
The similarities between stocks and securities are that they both represent financial instruments. However, a stock is only one form of security belonging to the equity class of all securities. A typical investor would want to create an investment portfolio containing assets from all security classes, in order to reduce his risk by spreading out his investments, and not ‘putting his eggs in one basket’. This clearly shows how stocks are different from securities as investing solely in the stock market is riskier than investing in a broader set of securities. If the investor wishes to invest only in shares, it would be advisable to spread the investment to a number of industries that may not be affected by the same economic or industrial influences.
What is the difference between Securities and Stocks?
• Financial instruments are of different types, characteristics, maturities, risk, and return levels and are broadly classified as securities.
• Stocks are also a form of security but belong to the equity/capital class, alongside the debt and derivative securities.
• Stocks represent an ownership interest in the company, while other securities such as debt securities allow the buyer to borrow funds, and derivative securities are used for hedging (guard against risks or financial losses) or speculative (form of obtaining profits through the fluctuation in derivative prices) purposes.
• An investor must include different types of securities in his portfolio instead of investing solely in stocks, as a well spread investment would reduce the investor’s risk of losing all his invested funds.