What are securities and how many types are there?
"Securities" are tradable financial instruments that hold monetary value and, in other words, can be converted into cash.
"Securities" are tradable financial instruments that hold monetary value and, in other words, can be converted into cash.
Securities can represent ownership in a publicly traded company (through stocks), or they can indicate money borrowed by the issuer that must be repaid (through bonds), or in general, they can be certificates of any other ownership rights. Broadly, they are categorized as follows:
Debt securities such as: bank debt instruments, bonds, and debentures
Equity securities including: common shares
Derivative instruments such as: options and futures contracts
As mentioned earlier, securities include any type of document or certificate that guarantees transferable financial rights for its holder. In other words, these are financial instruments that are transferable and, regardless of their type—whether preferred shares, common shares, bonus shares, rights issues, participation papers, derivatives, options, futures contracts, etc.—they hold a certain monetary value for their owner.
Securities include company shares or mutual fund units, bonds issued by companies or government intermediaries, options on shares, limited partnership units, and various types of formal investment instruments that are tradable and exchangeable.
Types of securities
These securities are divided into three categories, which include:
Equity securities, which consist of: preferred and common shares
Debt securities, which consist of: bonds, participation papers, and Islamic financial instruments
Derivative securities, which consist of: futures contracts and options
Characteristics of Islamic securities
Islamic securities possess certain characteristics which are outlined below:
Ownership of the holders
It is worth mentioning that most Islamic securities differ clearly in terms of ownership from interest-based (Riba) securities. These instruments usually represent shared ownership in a revenue-generating asset; this is the most important feature that distinguishes them from interest-based securities.
Nature of profit distribution
The legal nature of most Riba-based securities is that they are interest-bearing loans, which pay a fixed percentage of the principal as interest to the holders on a scheduled basis, regardless of the profitability of the underlying project or economic activity. This type of income constitutes interest-bearing debt, which is considered usury (Riba) from the perspective of Islamic jurisprudence, and therefore is not permissible for use in Islamic securities.
The profit from Islamic securities depends on the type of contract upon which the securities are based and, overall, these fall into three major groups:
First group: Securities based on sale and purchase of debt
These securities are designed so that their holders receive a fixed profit over a specific period.
Second group: Securities based on sale and purchase of physical assets
This group of securities is issued for the purpose of financing or sometimes liquidity provision.
Third group: Securities based on participation in the profits of an economic project
The legal nature of work in these securities involves investors participating in the development of a project or conducting an economic activity.
Guarantee of principal
Most interest-bearing securities are, by legal nature, loans with interest where, according to the contract, the issuer guarantees the principal amount of the securities. In other words, the issuer pays the nominal value of the securities to the holders upon maturity. Issuers of Islamic securities also strive to offer such guarantees to the holders. It should be noted that in Islamic securities, the guarantee of principal repayment differs based on the three groups mentioned earlier:
a. Guarantee of principal in securities based on debt sale and purchase:
In this group, based on the contract-centric nature of Islamic financial tools, the principal is guaranteed.
b. Guarantee of principal in securities based on sale and lease of physical assets:
In this group, a financial institution, on behalf of the holders, purchases physical assets and leases them to users, receiving rent payments regularly and distributing them to the holders.
c. Guarantee of principal in participatory securities:
In this group, the issuer collects investors’ capital and, on their behalf, enters into contracts such as Musharakah (partnership), Mudarabah (trust-based partnership), Muzara’ah (agricultural sharecropping), and Musaqat (orchard watering agreements) with economic agents to implement industrial, agricultural, commercial, or other projects.
d. Guarantee of principal in all Islamic securities through a third party:
In most operational models of Islamic financial instruments (Sukuk), the issuing institution, in the role of an agent, collects investors’ funds and, acting on their behalf, drafts a trade or participatory contract. Essentially, it acts as a financial manager between the investors and the end-users of the funds.
Securities are financial instruments that have monetary value and can be converted into cash. These instruments can prove ownership in a publicly traded company, claim against a company or a government entity, or any other ownership rights. Some sources refer to these instruments as tradable assets, but this definition does not cover all financial instruments.
It is worth mentioning that the mission of establishing the stock exchange was assigned in 1954 (1333 in the Iranian calendar) to the Central Bank, Chamber of Commerce, Ministry of Commerce, and the Ministry of Industry and Mines. After 12 years of research and investigation, this group prepared the laws and regulations for the formation of the stock exchange in 1966 (1345), and finally, the bill for the establishment of the Tehran Stock Exchange was approved by the National Consultative Assembly in May 1966.
Any type of investment that does not create ownership rights for its holder and obligates the issuer as the borrower to pay specific amounts to the holder at set intervals is called a fixed-income security.
One of the financial instruments in Iran’s capital and money markets isfixed-income securities, through which investors receive a specified interest rate at designated time intervals. The nature of these securities is based on borrowing, and both the interest and the principal are guaranteed for repayment by the issuer.
Fixed-income securities are considered a low-risk type of investment, making them particularly popular. Publicly traded companies issue securities to borrow from the capital market and pay interest to investors at specific intervals. It is worth noting that fixed-interest payments are not permitted in Islamic finance. Therefore, most fixed-income securities in Iran provide a type ofguaranteed provisional interest rate. In such cases, if the issuing company gains higher profits from the collected funds, it shares a portion of the extra profit with the investors.
Fixed-income securities can be divided into two categories:debt securitiesandcertificates of deposit:
Debt Securities:These are among the most common and popular fixed-income securities. They are debt-based and essentially represent a loan to the government, companies, or banks. In exchange for this loan, these entities pay interest to the investors. By issuing such securities, the government or other organizations raise the funds they need and use the capital to boost their activities or launch new projects. Debt securities are further divided intobondsandparticipation papers.
Certificates of Deposit (CDs):These are another type of fixed-income securities issued by banks, with the bank guaranteeing both the principal and interest payments. Interest is paid periodically based on the coupon structure of the CD. These certificates have a fixed interest rate and a defined maturity period, usually ranging from one to five years. CDs are classified intogeneral-purpose investment term CDsandspecial-purpose investment term CDs.
Advantages of Fixed-Income Securities include the following:
Disadvantages of Fixed-Income Securities are as follows:
It should be noted that equity securities are among the most important and commonly traded types of securities, and the majority of transactions in the stock market relate to stock trades, to the extent that some people refer to the stock exchange as the stock market. Compared to debt securities, stocks involve higher risk but also offer higher returns, which is why many investors prefer this market.
Equity, also known as owner’s equity, represents the ownership interest of the business owners. The term "Equity" or "Owner Equity" in English refers to a type of ownership in a company’s assets. In other words, the portion of a company’s value that belongs to an individual or legal entity is known as owner's equity.
A notable feature of equity securities is that if a company is dissolved, after subtracting liabilities from its assets, the remaining value is distributed to the shareholders according to their ownership percentage. It is also worth noting that owner’s equity may increase as a result of profitable business activities or decrease due to business missteps. Furthermore, if a company chooses not to distribute its annual profit from selling products or services among shareholders, the owner’s equity within that company increases. Therefore, it is very important to pay attention to which company you invest in and the type of securities (stock) you receive.
It is important to understand that stocks represent the ownership interest of shareholders in an entity (company or cooperative) and are realized in the form of capital shares, including the following:
Common Stock:Holders of common stock typically receive dividends and can profit from capital appreciation when selling their shares. This type of stock grants the holder the right to participate in the management of the company in which they hold shares. In the event of the company’s bankruptcy, after all obligations to creditors are settled, these shareholders are entitled to the remaining assets.
Preferred Stock:Preferred stock is a type of transferable ownership certificate that grants the holder a fixed and limited claim to the company’s assets. The term "preferred" indicates that dividend payments on this stock take precedence over those of common stock and must be paid in full, even if the company goes bankrupt.
Advantages:
Disadvantages:
Another type of security in the Tehran Stock Exchange and other financial markets is derivative securities, whose value is determined based on the price of one or more underlying assets. Simply put, derivatives mean that instead of buying and selling an asset like gold, you buy and sell a contract that is based on gold.
Derivatives refer to a type of financial contract whose value is derived from one or more underlying assets such as bonds, stocks, or even commodities like agricultural and petrochemical products. These securities are established between two or more parties and can be traded either on the exchange or over-the-counter (OTC).
Among the characteristics of derivatives is their significant role in risk management, enhancing market efficiency, and price discovery. As mentioned, the value of these instruments is derived from the value of underlying assets such as bonds, stocks, etc., offering investors the opportunity to take advantage of market opportunities in various ways.
Futures contracts, equity derivatives, forward contracts, swaps, options, currency derivatives
Advantages of derivative securities include:
However, the disadvantages of these securities include the following:
TheStock Exchangerefers to a market established for the trading of securities such as stocks and various types of debt instruments. A large number of buyers and sellers participate in this market and trade their desired assets, including company stocks, whose prices are determined based on supply and demand.
The termBourse(from the French word for the stock exchange), which is equivalent toStock Exchangein English, refers to this environment, which is in fact a formal and organized capital market where the buying and selling of company shares and securities take place according to specific laws and regulations. The pricing of stocks in the exchange is determined by supply and demand.
The stock exchange represents a segment of the capital market and is one of the key financial and economic pillars of the country. This market plays an effective role in providing financial and investment resources for the economic development and growth of the country. These securities, in addition to high liquidity, possess characteristics such as transparency, investment security, income generation, health indicators, and risk control.
Regulatory Institutions of the Securities Market
Among the factors that investors always consider in making investment decisions are risk and return, and these two cannot be separated; because any decision for a safe investment is based on the relationship that exists between risk and return.
Definition of Riskin the stock market refers to the possibility of incurring a loss, or the potential for price fluctuations of shares under various conditions. It also includes the possibility of failing to achieve the expected return.
Definition of Returnin securities refers to the expected amount or the average of all possible returns from investments in a portfolio. It is worth mentioning that the average return is also referred to as the expected return and typically refers to the monthly return on a stock.
Types of Risk in Securities
The capital market faces two main types of risk:
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.
As mentioned, securities are financial instruments that possess monetary value and can be traded by their holders. These securities come in different forms such as common shares, preferred shares, bonus shares, and participation bonds, and when used properly and rationally, they can generate good returns for individuals. From the name "Securities and Exchange Organization" itself, it is evident that these assets are inseparable parts of the capital market. By understanding their various types and characteristics, one can have a better analysis of the market conditions for investment.