Different Types of Stocks and Securities to Know About
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As a beginner investor, you know that stocks are an essential part of any portfolio. Stocks fall under one category of securities—so what about the different kinds of securities?
Let's discuss the different types of stocks and securities you should know about.
First, what are securities?
Broadly, the term "securities" means any financial instrument that has value and can be exchanged between different parties. Many securities are publicly traded, which makes them available for investment on a stock exchange.
Securities can include any of the following financial instruments:
Exchange-traded funds (ETFs)
Other items have financial value but are not securities. They can't be easily bought or sold due to no set exchange value:
Gold and other precious metals
NFTs (non-fungible tokens) and other cryptocurrencies
What are the different types of securities? Get to know the two main types
Securities can be categorized into two main types: equity and debt.
There are a couple of other kinds that have elements of both but are different. We'll cover that below.
Equities are the first main type of security
Equities are what you're referring to when you talk about buying stocks.
Investing in equities means you gain an ownership interest in an entity (like a company, partnership, or trust). Buying equities (aka shares) gives you a stake in the business. Your investment will grow or shrink depending on the stock's performance.
One benefit of equity investing is the potential for earning capital gains once you sell the asset. Some equities are also dividend stocks, which pay a portion of earnings to shareholders regularly.
Debt securities represent a sum of borrowed money that must be repaid. These are also called fixed-income securities and generally refer to bonds.
When you invest in debt securities, you loan money to a government entity or company. In return, you receive fixed-interest payments on a regular basis. The terms of the agreement will state the loan amount, interest rate, and date of maturity (when the borrower must repay the principal).
Besides bonds, debt securities also include certificates of deposit (CDs). In the States, types of fixed income products are guaranteed and thus low-risk (but also lower return, and don't always beat inflation).
A third kind of securities merges aspects of both equity and debt securities. Hybrid securities include a fixed-income and variable-income component.
Hybrid securities can include equity warrants, convertible bonds, and preference shares.
Derivatives are financial instruments that receive their value from an underlying asset or group of assets. Frequently, the underlying assets for derivatives are stocks, bonds, commodities, currencies, market indices, and interest rates.
Derivatives include futures and options.
Examples of securities in action
In the UAE, you might invest in the Dubai Financial Market (DFM), which deals in equity, debt, and ETFs. The Abu Dhabi Securities Exchange (ADX) mainly deals in equities, funds, and bonds. The NASDAQ Dubai is another option for equities trading in the country. These entities are regulated by the Securities and Commodities Authority (similar to the SEC in the United States).
In the US, the NYSE and NASDAQ are a couple of ways to trade equity, with ETFs often listed on the NYSE Arca or NYSE American. You can buy bonds on NYSE Bonds and Nasdaq Bond Exchange.
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