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18-2 Securities: Stocks & Bonds CH 18]

investments, and it is best to begin with 10% or more and budget to live off the rest of the
income, and (2) don’t allow the 10%+ to sit around idle, but rather put it to work to increase
wealth. Money has power – earning power that should be exercised. Yes, most people start
small, and beginning small gets a person started. However, NOT STARTING LEAVES ONE WITH
NOTHING.
As this chapter is titled Investments in Securities, it is important to discuss what a
security is, why it is created and purchased/exchanged, and the Securities Market.
Equities: Ownership,
represented by stocks. What Is A Security?

Debts: Amount owed The term security refers to a negotiable *financial instrument that holds some type of
others and represented monetary value and is **fungible (able to be traded). For publicly traded companies it
by the issuance of represents ownership – via stock – a creditor relationship when it is the entity’s bond – or
bonds—a promise to rights to ownership as represented by an option. All of these items, stocks, bonds and
pay. options can and are traded (fungible) for profit and loss.

Securities are broadly categorized into two distinct types: equities and debts. Equity
Capital stock: Refers represents ownership, and is represented by shares of stock which includes both common
to the shares of and preferred stock. These stocks, when initially offered for sale, transfer small amounts of
ownership that have ownership (equity) to raise capital for the firm and are capital stock. Holders of equity
been issued by a securities are necessarily not entitled to regular payments, though equity securities often do
corporation. pay dividends to the share holders (owners) derived from the profits of the business activity.
Equities (stocks) in the marketplace can experience a change in their value due to the
Subordinated debt: In interactions of others who want to purchase ownership from other owners. That is, if a
finance, subordinated
debt is debt which ranks company’s stock is desirable to the public, the price they pay for each share will rise, and
after other debts if a conversely when the public no longer seeks after that ownership then the market price falls.
company falls into Debts, as the name implies are amounts owed to others, and for corporations, these are
liquidation or issued as bonds which represent an amount of money a company borrows from an
bankruptcy. Such debt individual who loans the company money. The issuance of bonds, a debt security, is unique
is referred to as to corporations as a means of borrowing capital which is denied sole proprietors and
'subordinate', because partnerships. Debt securities are issued for a fixed term, with a determined interest rate,
the debt providers have
subordinate status in and at the end of the time period indicated, may be redeemed by the issuer – purchased
relationship to the back/paid for. Debt securities may be issued as convertible, whereby the lender may receive
normal debt. as payment when due, stock in the issuing company, thus these are termed convertible
bonds. Debt securities are either secured (backed by assets called collateral) or unsecured
Convertible bond: In with no assets pledged, and, if unsecured, may be contractually prioritized over other
finance, a convertible unsecured, subordinated debt in the case of a bankruptcy.
bond or convertible note
or convertible debt is a
type of bond that the Purchasing Securities
holder can convert into Companies create securities for sale as a means of raising new capital for their
a specified number of operations. As the originating issuer, they can generate a lot of money when they go public,
shares of common selling stock in an Initial Public Offering (IPO). The sales of IPO’s are generally handled by
stock in the issuing mortgage bankers, stock brokerage firms and investment houses that take these offerings
company or cash of
equal value. It is a and sell them through the security exchanges, such as the New York Stock Exchange; this is
hybrid security with debt the primary market. Depending on a firm’s market demand or pricing structure, raising
- and equity-like capital through securities can be preferential alternative to financing through loans.
features.

*Financial instrument: A monetary contract between parties. We can create, trade, or modify them. We can
also settle them. A financial instrument may be evidence of ownership of part of something, as in stocks and
shares. Bonds, which are contractual rights to receive cash, are financial instruments. Checks (UK: cheques),
futures, options contracts, and bills of exchange are also financial instruments. Securities, i.e., contracts that are
given value to and then traded, are financial instruments. Put simply; a financial instrument is an asset or
package of capital that we can trade.

**Fungible: At law, able to replace or be replaced by another identical item; mutually interchangeable.
Fungibility is the property or ability of a good, asset or commodity to be interchanged with other individual goods
or assets of the same type; the units are essentially interchangeable; i.e. sweet crude oil, company shares,
precious metals such as gold or silver, and currencies and in the exchange the value is equal. Fungible assets
simplify the exchange and trade processes, as fungibility implies equal value between the assets.

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