What are securities and what are their types?

Securities are tools that can represent ownership in a publicly traded company (for example, through stocks) or indicate a debt that the issuer is obliged to repay (such as bonds). In general, these instruments can also serve as certificates of other types of ownership rights. Broadly, the classification of securities is as follows:

1. Debt securities
2. Equity securities
3. Derivative instruments

What are securities?

As mentioned earlier, securities include any type of certificate or document that guarantees transferable financial rights for its holder. In other words, securities are a type of financial instrument that can be transferred and, regardless of their form such as preferred shares, common shares, bonus shares, subscription rights, participation bonds, derivatives, options, futures contracts, etc. they possess a certain monetary value for their owner.
Securities include company shares or mutual fund units, bonds issued by corporations or governmental intermediaries, stock options, limited partnership units, and various types of formal investment instruments that are tradable and interchangeable.

History of securities

It is worth noting that in 1954 (1333 in the Iranian calendar), the mission of establishing a stock exchange was assigned to the Central Bank, the Chamber of Commerce, the Ministry of Commerce, and the Ministry of Industry and Mines. After twelve years of research and evaluation, this group prepared the regulations for establishing the stock exchange in 1966 (1345), and eventually, the bill for the establishment of the Tehran Stock Exchange was approved by the National Consultative Assembly in May 1966 (Ordibehesht 1345).

Types of Securities

Securities are generally divided into three main categories, each with its own specific characteristics and encompassing a range of financial instruments. These categories are as follows:

Equity Securities

These securities represent ownership in a company and are mainly divided into two types:

1. Preferred Shares: These shares grant their holders special privileges such as priority in receiving dividends or voting rights in corporate decisions.
2. Common Shares: These shares provide their holders with voting rights in the company’s general meetings and entitle them to a share of the company’s profits based on performance.

Debt Securities

These securities represent a debt obligation of the issuer to the holders and are typically issued for the purpose of financing specific projects or activities. Different types of debt securities include:

1. Bonds: Issued by corporations, governments, or financial institutions, bonds include a commitment to repay the principal along with interest to the bondholders.
2. Participation Bonds: Issued to finance specific projects, the returns are typically paid to investors as a percentage of the income generated by the project.
3. Islamic Financial Instruments: Securities structured in accordance with Islamic Sharia principles. One prominent example isSukuk, which are considered the Islamic counterpart to conventional bonds.

Derivative Securities

These are contracts whose value is derived from an underlying asset. The most important derivative instruments include:

1. Futures Contracts: Agreements in which the buyer and seller agree to purchase or sell a specific asset at a predetermined price on a specified future date.
2. Options Contracts: Contracts that give the holder the right but not the obligation to buy or sell a specific asset at a predetermined price within a set timeframe.

Characteristics of Securities

Islamic securities possess certain features, which are explained below:

Ownership of Securities Holders

It is worth mentioning that most Islamic securities differ significantly from interest based securities in terms of ownership. These securities usually consist of a shared ownership interest in income generating capital. This is the most important feature that distinguishes them from interest based securities.

Profit Distribution quality

The legal nature of most interest based securities is that of an interest bearing loan, which pays a fixed return based on a predefined schedule regardless of the actual performance of the project or economic activity. This type of return constitutes a loan with interest (riba), which is considered usurious and impermissible under Islamic jurisprudence, and thus cannot be used in Islamic securities.
The profit in Islamic securities depends on the type of contract on which the securities are structured and can generally be divided into three main groups:

• First Group: Securities Based on Debt Trading

These are structured so that the holders receive a predetermined return within a specific period.

• Second Group: Securities Based on Physical Asset Trading

These are issued for financing purposes and sometimes for liquidity management.

• Third Group: Securities Based on Profit Participation in an Economic Project

The legal nature of these securities is such that the capital holders participate in the construction of a project or an economic activity.

Capital Guarantee in Islamic Securities

Most interest based securities are considered interest bearing loans, where the issuer guarantees the return of the principal amount to the investors according to the contract and repays the nominal value of the securities at maturity.
Islamic securities also aim to provide a similar guarantee for capital repayment, but this guarantee differs from conventional ones. The types of capital guarantees in Islamic securities are as follows:
Securities Based on Debt Trading
In these securities, the principal is guaranteed through Islamic contracts. The issuer uses these contracts to ensure repayment of the principal at maturity.
Securities Based on Physical Asset Trading
In this model, the financial institution purchases physical assets and leases them to users. The rental income is paid to the securities holders, which ensures the return of the principal.
Participation Securities
In this category, investors provide their capital to the issuer, who invests it in various projects such as industrial, agricultural, or commercial ventures. The principal is guaranteed through participation in these projects.
Capital Guarantee by a Third Party
In this method, the issuer acts as an agent, collects the funds from investors, and invests them in participatory or exchange contracts. The guarantee of principal repayment is provided by the issuer acting as a financial manager.

Securities Market

The Stock Exchange is a market introduced for trading securities such as stocks and various types of debt instruments. A large number of buyers and sellers are present in this market, trading their desired assets, including company shares, whose prices are determined based on supply and demand.
The word "market" in French is bourse, which means the same as the Stock Exchange in English. This environment is, in fact, an official and organized capital market in which the buying and selling of company shares and securities are carried out according to specific laws and regulations. The determination of stock prices in the exchange is based on supply and demand.

Types of Securities Markets

Securities Market: A market where securities are bought and sold.
Exchange: Another name for this market. The stock exchange is a professional capital market that operates entirely intelligently.
Market Supervisor: The duty of this market is to intervene in case of observing violations by companies and shareholders.

Functions of the Securities Market

• Trading of securities
• Future stock transactions
• Advising companies on being accepted in the exchange
• Advising companies on offering in the exchange

The stock exchange represents the capital market, which is considered one of the main financial and economic pillars of the country. This market plays an effective role in providing financial and capital resources for the country's economic growth and development. These securities, in addition to having high liquidity, are characterized by features such as transparency and investment security, income generation, being an indicator of economic health, and risk control.

Regulatory Institutions Over the Securities Market

1. Minister of Economy as the head of the council
2. Minister of Commerce
3. Governor of the Central Bank
4. Presidents of Iran’s Chambers of Commerce, Industry and Mines, and Cooperatives
5. President of the Securities and Exchange Organization as the secretary of the council and the spokesperson of the organization
6. Attorney General or his deputy
7. One representative on behalf of the associations
8. Three financial experts necessarily from the private sector in consultation with the professional organizations of the securities market
9. One expert exclusively from the private sector by order of the relevant minister
10. Three financial experts necessarily from the private sector in consultation with the professional organizations of the securities market
11. One expert exclusively from the private sector by order of the relevant minister

Risk and Return of Securities

Among the factors that are always examined by investors when making investments are risk and return, and they cannot be considered separately; because making a secure investment decision is always based on the relationship that exists between risk and return.
The definition of risk in the stock market means that there is a possibility of incurring a loss, a possibility of price fluctuations in stocks depending on different conditions; also, there is the possibility of failing to achieve the expected return.
The definition of return in securities is the expected amount or the average of all possible returns of the investments in a portfolio. It is worth noting that the average return is also known as the expected return and refers to the monthly return of a stock.

Types of Risk in Securities

The capital market has two main types of risk:

• Systematic Risk: This type of risk relates to the entire market and, in addition to being non diversifiable, the investor has no control over it.
• Unsystematic Risk: This type of risk pertains to a specific stock or a particular industry, is diversifiable, and can be reduced.

Some common methods used to measure risk include:
Standard Deviation, Beta, Sharpe Ratio, Conditional Value at Risk (CVaR), Value at Risk (VaR), and R squared.