WallStreetMojo

WallStreetMojo

WallStreetMojo

MENUMENU
  • Free Tutorials
  • Certification Courses
  • 250+ Courses All In One Bundle
  • Login
Home » Accounting Tutorials » Assets Tutorials » Investment Securities

Investment Securities

What are Investment Securities?

Investment securities are purchased by the investors, with or without any middlemen or agent, only for 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.

Note: It is the intention of the securities buyer, which matters while classifying the security as investment security or trading security. Security has a 10-year maturity period can still be classified as trading security if the purchaser of the security intends to hold it for a short period (maybe just to gain from the price change).

Types of Investment Securities

Investment Securities Types

A) Traditional Investment Securities

#1 – Gold

It is the earliest form of investment from the time 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:

Popular Course in this category
Sale
All in One Financial Analyst Bundle (250+ Courses, 40+ Projects)
4.9 (1,067 ratings)
250+ Courses | 40+ Projects | 1000+ Hours | Full Lifetime Access | Certificate of Completion
View Course
  1. Government Securities
  2. Debentures of Private Sector companies
  3. 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:

  1. 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.
  2. 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. It is a fund created to invest in various equity or debt securities or a mix of both and funded by its unit-holders. Unit-holders are the investors who are the ultimate owners of the mutual fund. The idea is to diversify 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 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 shortly will invest in more liquid securities than investors who can lock-in their investment. The motivator to investors locking their securities for a longer term is the 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.

Recommended Articles

This article 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 –

  • Investment Risk
  • Investment Income Types
  • Portfolio Investment Definition
  • Long Term Investments Types
0 Shares
Share
Tweet
Share
Primary Sidebar
Footer
COMPANY
About
Reviews
Contact
Privacy
Terms of Service
RESOURCES
Blog
Free Courses
Free Tutorials
Investment Banking Tutorials
Financial Modeling Tutorials
Excel Tutorials
Accounting Tutorials
Financial Statement Analysis
COURSES
All Courses
Financial Analyst All in One Course
Investment Banking Course
Financial Modeling Course
Private Equity Course
Venture Capital Course
Excel All in One Course

Copyright © 2021. CFA Institute Does Not Endorse, Promote, Or Warrant The Accuracy Or Quality Of WallStreetMojo. CFA® And Chartered Financial Analyst® Are Registered Trademarks Owned By CFA Institute.
Return to top

WallStreetMojo

Free Investment Banking Course

IB Excel Templates, Accounting, Valuation, Financial Modeling, Video Tutorials

* Please provide your correct email id. Login details for this Free course will be emailed to you

Book Your One Instructor : One Learner Free Class
Let’s Get Started
Please select the batch
Saturday - Sunday 9 am IST to 5 pm IST
Saturday - Sunday 9 am IST to 5 pm IST

This website or its third-party tools use cookies, which are necessary to its functioning and required to achieve the purposes illustrated in the cookie policy. By closing this banner, scrolling this page, clicking a link or continuing to browse otherwise, you agree to our Privacy Policy

Login

Forgot Password?

WallStreetMojo

Free Accounting Course

You will Learn Basics of Accounting in Just 1 Hour, Guaranteed!

* Please provide your correct email id. Login details for this Free course will be emailed to you

New Year Offer - All in One Financial Analyst Bundle (250+ Courses, 40+ Projects) View More