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Types of securities
Securities are financial assets which represent ownership in or debt of companies. Securities refer to both shares and bonds, which are the two most common types. A share confers on its owner a legal right to the part of the company's profit. It represents ownership in a company and entitles the owner to participate in the distribution of the company's profit. When an investor buys a share, using the services of a specialist company or broker, he or she becomes a shareholder (stockholder and owns a part of a company. Shareholders on the other hand, as owners of the company, have no guarantee of their investment. If the company fails, their shares will become worthless. Although because of limited liability, shareholders are not responsible for the company's debt. !ividends are paid to shareholders out of profits, which means that if the company has had a weak business performance, no dividends are distributed. "he amount of dividend is decided by the #oard of !irectors and declared at the annual general meeting of the shareholders. It is e$pressed as a percentage of the face value of the shares. "he common classes of shares are% &rdinary shares (common stock or e'uities % which have no guaranteed amount of dividend but carry voting rights( traded on stock e$changes and represent one of the most important types of security for investors( fi$ed unit of the share capital of a company( )reference shares (preferred stock % an intermediate form of security between an ordinary share and a debenture( in the event of li'uidation, they are less likely to be paid off than debentures, but more likely than ordinary shares( preference shares may be redeemable at a fi$ed or variable date( voting rights are normally restricted( owners are entitled to a fi$ed rate of dividends which is called practically interest. *ounder's shares% shares issued to the founders of a company, who often have special rights to dividends. !eferred ordinary shares% ordinary share, formerly often issued to the founding members of a company, in which dividends are only paid after all other types of ordinary share have been paid( such shares often entitle their owners to a large share of profit. Shares in public companies may be bought and sold in an open market, e.g. a stock e$change. Shares in a private company are generally sub+ect to restrictions on sale, e.g. they must be offered to e$isting shareholders first or the directors' approval must be sought before they are sold elsewhere. ,mployee share ownership plan (,S&) % method of giving employees shares in the business for which they work. A bond is a type of debt issued in certificate form, on which interest is paid over a certain period of time. &n the e$piration date (date of maturity the entire face amount is paid to the owner of the bond. Irredeemable or undated securities do not bear a date at which the capital sum will be repaid or redeemed. A company can borrow money from investors by issuing bonds, loans for fi$ed periods with fi$ed interest rates.

#onds may be issued not only by companies, but also by the governments or municipalities. G stocks or bonds (gilt edged securities % also called gilts( used to raise money to finance government pro+ects( gilts are among the safest of all investments, as the government is unlikely to default on interest or on principal repayments( issued for a fi$ed period of time( receive a fi$ed rate of interest Local Authority Bonds: issued by local authorities( the money invested represents loan to the authority( usually bought by institutions, but can be bought also by the public( a secure form( pay a fi$ed rate of interest( there is a fi$ed date for repayment. Debentures (+.rad/kk0tv/ny % are similar to bonds( they are issued by companies and are mostly secured, which means that the company guarantees the owner's rights over the company's assets( debenture holders are not involved in the management of the company. BONDS 1ompanies finance most of their activities by way of internally generated cash flows. If they need more money they can either sell shares or borrow, usually by issuing bonds. 2ore and more companies now issue their own bonds rather than borrow from banks, because this is often cheaper% the market may be a better +udge of the firm's creditworthiness than a bank, i.e. it may lend money at a lower interest rate. "his is evidently not a good thing for the banks, which now have to lend large amounts of money to borrowers that are much less secure than blue chip companies. #ond3issuing companies are rated by private ratings companies such as 2oody's and Standard 4 )oors, and given an 'investment grade' according to their financial situation and performance, Aaa being the best, and 1 the worst, ie. nearly bankrupt. &bviously higher the rating, the lower the interest rate at which the company can borrow. 2ost bonds are bearer certificates, so after being issued (on the primary market , they can be traded on the secondary bond market until they mature. #onds are therefore li'uid, although of course their price on the secondary market fluctuates according to changes in interest rates. 1onse'uently, the ma+ority of bonds on the secondary market are traded either above or below par. A bond's yield at any particular time is thus its coupon (the amount of interest it pays e$pressed as a percentage of its price on the secondary market. *or companies, the advantage of debt financing over e'uity financing is that bond interest is ta$ deductible. In other words, a company deducts its interest payments from its profits before paying ta$, whereas dividends are paid out of already3ta$ed profits. Apart from this 'ta$ shield', it is generally considered to be a sign of good health and anticipated higher future profits if a company borrows. &n the other hand, increasing debt increases financial risk% bond interest has to be paid, even in a year without any profits from which to deduct it, and the principal has to be repaid when the debt matures, whereas companies are not obliged to pay dividends or repay share capital. "hus companies have a debt3e'uity ratio that is determined by balancing ta$ savings against the risk of being declared bankrupt by creditors. 5overnments, of course, unlike companies, do not have the option of issuing e'uities. 1onse'uently they issue bonds when public spending e$ceeds receipts from income ta$, 6A", and so on. 7ong3term government bonds are known as gilt3edged securities, or simply gilts, in #ritain, and "reasury #onds in the 8S. "he #ritish and American central banks also sell and buy short3term (three3month "reasury #ills as a way of regulating the money supply. "o reduce the money supply, they sell these bills to commercial banks, and withdraw the cash received from circulation( to increase the money supply they buy them back, paying with newly created money which is put into circulation in this way.