What are Investment Securities?
Investment securities are purchased by the investors, with or without any middlemen or agent, only for the purpose of investment and to hold it for the long term. These are reflected as non -current investments in the financial statements and includes fixed income and variable income bearing securities. On the other hand, Trading Securities are those securities that are purchased for intra-day transactions or the purpose of which is to gain from short term price change.
Types of Investment Securities
A) Traditional Investment Securities
#1 – Gold
It is the earliest form of investment when none of the developed investment markets were available for the investors. It was used as an alternative to money in ancient times and was being started using as an investment when its demand-supply balance got disturbed. Central banks and the International Monetary Fund have a great role to play in determining the gold prices.
#2 – Real Estate
Purchasing, developing, operating and maintaining, selling and renting real estate properties has been and is one of the traditional forms of investment. The behind investing in real estate is to gain in the form of rentals (which is like regular cash flow for managing day to day operating expenses) and to gain from price rise (benefit for holding the property for long term).
#3 – Commodities
Commodities were used as an investment to gain from the demand and supply mismatch as these are seasonal. The main costs incurred are storage costs and the gain arrives from convenience yield.
B) Modern Investment Securities
#1 – Fixed Income Bearing Securities
Those securities which will generate fixed cash flow either by way of interest (particularly on debentures/bonds) or by way of a fixed percentage of dividend (in case of preference shares) are considered as fixed income bearing securities. Return on these securities would not be affected by any market factors. Lower risk is involved in such types of securities.
#2 – Debentures/Bonds
These are long term investment options carrying fixed income based on the rate of interest. The risk of such types of securities is dependent on the type of issuer. The major risk faced is the credit risk of the issuer of these securities. Various investment alternatives are available under this category:
- Government Securities
- Debentures of Private Sector companies
- Public sector unit (PSU) bonds
#3 – Preferred Stock
Preferred Stock is the stock the holders of which carry preferential rights over common stock or equity in two circumstances:
- Payment of dividend i.e. these stockholders get a fixed rate of dividends and get paid before any dividend is paid to the common stockholders.
- In the event of liquidation, these shareholders have preferential rights of payment of capital before anything is distributed to the common stockholders but after debenture and bondholders.
#4 – Variable Income Bearing Securities
Securities other than fixed income bearing securities are considered as variable income bearing securities. Return on these securities is not fixed and varies because of the changes in the market factors.
#5 – Common Stock or Equity
Common stockholders are the owners of the company. It means such stockholders have ultimate rights over the profits and assets of the company. Income on such stock is variable depending on the risk, rate of return, liquidity, growth, marketability, etc. Such investments are riskier as well as more liquid investments. These investment securities can easily be traded in primary as well as the secondary markets.
#6 – Mutual Funds
Mutual funds, in simple terms, is the portfolio of various securities. This is a fund that is created for the purpose of investing in various equity or debt securities or a mix of both and is funded by its unit-holders. Unit-holders are the investors who are the ultimate owners of the mutual fund. The idea is to have diversified risk as the risk gets diluted by investing in a portfolio rather than in a single stock.
Factors to Consider Before Buying Securities
Factors to be considered for the acquisition of investment securities:
#1 – Risk Appetite
The risk appetite for every investor is different from another. The risk appetite basically depends on the income, personal liabilities or expenses and savings of the investor. For a young investor who has no personal liabilities to entertain and who earns and saves good, his risk appetite is more than an investor who has more fixed personal liabilities and thus saves a lesser amount of money.
Investors having a good risk appetite can invest in more risky securities say equity than investors having a low-risk appetite. They may consider investing in fixed income securities.
#2 – Lock-in Period
Investors who expect the urgent need of money or liquidity in the near future will invest in more liquid securities than investors who are able to lock-in their investment. The motivator to investors locking their securities for a longer term is extra return generated in the name of liquidity lost.
#3 – Personal Traits
Personal traits of an investor such as age, tradition, etc. also determine the type of investment securities to be acquired. A young person can take the risk and will invest in long term securities rather than a retired employee whose primary aim is to generate monthly cash flow to meet his day to day expenses.
#4 – Investment Objective
If the objective is to earn regular cash flow, then dividend or interest-paying securities are better options whereas if the objective is to earn from price rise, growth stocks need to be considered.
This has been a guide to What are Investment Securities & its Definition. Here we discuss the types of investment securities along with acquisitions. You can learn more about from the following articles –