Securities are financial instruments that represent ownership, debt, or derivative contracts. They are used for investment purposes, to raise capital, or to manage risk. They are used by investors to invest in these organizations and to earn returns on their investments. Different types of securities are used for different purposes and offer different benefits and risks. There are various types of securities available in the financial markets, and each type serves a specific purpose.
Why did Standard Chartered Bank issue various securities? The answer is that different investors have varying risk-return preferences. As a result, in order to appeal to the broadest possible market, the bank should offer securities that appeal to as many different types of investors as possible. Common stock can be purchased by an investor who is willing to take on more risk in exchange for a higher return. However, investors who want to reduce their investment risk may prefer bonds or debentures.
The second reason is the security’s popularity. At different points in time, different securities are more popular. As a result, when companies need money, they tend to issue whatever is popular. Third, the duration of the required funds may force the company to use a specific source of financing. If a company needs money for a few months, it may issue short-term securities such as commercial paper. Similarly, when a company requires long-term capital, it will issue a perpetual bond, preferred stock, or common stock.
Financial markets trade various types of securities. Some of these securities, such as treasury bills, bills of exchange, commercial paper, and so on, are traded in the money market. Others (long-term security) are bought and sold in the capital market. The capital market trades Treasury bonds, corporate bonds, preferred stock, common stock, and other securities. A company can issue a variety of securities, including commercial papers, bonds, preferred stocks, common stocks, and so on. Standard Chartered Bank, for example, has raised capital by issuing debentures, preferred stock, and common stock. Here are some of the reasons for using different types of securities:
- Equity Securities: Equity securities, such as common stocks, represent ownership in a company. They are used to raise capital for the company and provide investors with a share of the profits through dividends or capital appreciation. Equity securities are also used for corporate governance, as shareholders have the right to vote on important company decisions.
- Debt Securities: Debt securities, such as bonds and notes, represent a loan from an investor to the issuer. They are used to raise capital for a company or government and provide investors with regular interest payments and repayment of the principal at maturity. Debt securities are less risky than equity securities as they provide a fixed income stream and have a priority claim on the company’s assets in case of bankruptcy.
- Derivative Securities: Derivative securities, such as options and futures contracts, derive their value from an underlying asset. They are used for risk management, speculation, and hedging. For example, a farmer might use a futures contract to lock in the price of a crop before it is harvested to protect against price fluctuations.
- Hybrid Securities: Hybrid securities, such as preferred stocks and convertible bonds, have characteristics of both equity and debt securities. They are used to provide flexibility in financing and investment decisions. For example, a company might issue convertible bonds that can be converted into common stocks at a later date to raise capital without diluting existing shareholders’ ownership.
In summary, different types of securities are used for various purposes, including raising capital, providing income or returns, managing risk, and providing flexibility in financing and investment decisions.
