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Classification of Securities

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Classification of Securities

Classification of Securities. Before analyzing securities, it is essential for financial analysts, economists, business policymakers, security investors, academicians to study and develop an understanding of different classes of securities. Depending upon a wide variety of considerations, securities can be categorized into four broad groups viz;

i. Bond,
ii. Common stock,
iii. Preferred stock and
iv. Derivative securities.

i. Bonds are fixed income securities with a fixed maturity. There is a specified date at which time the firm must pay all liabilities it owes to the bondholders who do typically have the fixed claim on the income of the firm. In addition, bondholders have fixed claim on the assets of the firm. More specifically, when the bonds mature or in the event of liquidation of the firm, the bondholders are entitled to receive their principal having a priority over any of the claims of the equity owners.

ii. Equity shares or common stocks called to be perpetual lie on the other side of the securities spectrum. Common stocks or equities have no maturity period. They exist as long as the corporation exists. Common stockholders have the residual claim against the income and assets of the firm.

iii. Preferred stock basically called the hybrid security lies somewhere between those of common stock and bonds. Like bondholders, the holders of preferred stock have a fixed claim on the income of the corporation. On the other hand, like common stock preferred stock is a perpetual liability of the firm.

iv. Derivative securities include warrants, options, futures contracts. Part, if not all, of their value is derived from the value of another security.

Securities Markets Distinguished
Investment defined as the changes in capital stocks. In the economic sense, capital formation is the change in the stock of the capital goods. According to the views of capitalistic economy, capital formation or accumulation of capital for investment and industrial development of an economy would, no doubt, be meaningless without an organized market or group of markets. In this connection, it is sine-qua-non to transfer the savings from surplus unit to those seeking funds for investment in economic goods and services for the rapid economic development and emancipation. To make effective this transfer, a variety of instruments representing money and claims to money are employed. Savers provide the funds and expect to get a reasonable return. Users of the funds are supposed to get income, price appreciation, or both.

 

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