What is a security

Category: Investment Life

A Security is a technical name to represent an ownership, through a financial instrument, of a share in a company, an obligation over a given government or a corporate agent.

Most popular securities are stock, ETF’s and bonds.

a. Stock

if you’re interested in investing the first thing you need to do if get familiar with some concepts. The very first one is what constitutes as a stock.

A stock is a type of security that constitutes as a partial right of ownership over a company.

Companies sells stocks in exchange for cash to fund its operations. In return, investors receive a share of the company earnings. When an investor buys a stock from any given company, immediately becomes a shareholder of that company.

There are two ways an investor could profit from a stock, changes in the value of the stock and payment of dividends.

Imagine that you are interested in investing in 10 shares of Twitter. If the Twitter stock is valued in $35, you will require an investment of $350 . In the case that the stock increased its price to $40 for example, you will receive a profit of $5 for each stock, this is $50 in total.

In some cases, you will hear terms like “Blue Chip” or “Penny Stock”. These are terms that refer to the value and reputation of a company’s shares. The former is related to companies that are well known, with remarkable reputation, financially solvent and with widely accepted products. On the other side, a “Penny Stock” indicates that the company is rather small, and its shares have a considerably low price, in most cases less than a dollar.

While “Blue Chip” stocks are considered relatively solid, “Penny Stocks” are highly speculative and are related to riskier investment strategies.

a. ETF

An ETF is a security that gives an option for diversification to the buyer of a basket of assets.

ETF explained

Imagine that you consider that social media companies are the next big thing on the markets. In order to get a piece of the cake you have the option to purchase stocks from a company that publicly trades its shares, let’s call it Facebook.

However, Facebook is only a part of a bigger picture on social media, so you’ll be ignoring the profits, and risks of course, of other companies in that sector. This is where an ETF makes its appearance by giving the option of buying a security focused on a given sector.

In this case a fund will focus its portfolio only on social media companies, offering investors shares over its portfolio.

Instead of buying several shares and stocks from different social media companies, you’ll only have to acquire a piece of that fund, through an ETF.

Sooner after you start your investment account, you’ll encounter thousands of ETF’s that replicates all kind of securities such as stock, indices, sectors, bonds or commodities.

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