Equity and debt securities - types and features

Securities vary in many classifications and typologies. In the article we will offer you one of them. This is a division into equity and debt securities. Let us present in detail the characteristics and content of each of the categories, and as a result of the material, we compare them with each other.

Equity papers

We start a conversation about debt and equity securities. To the latter, we attribute those that assign to the owner a certain part of the property of the issuing company. Buying an equity security, you acquire the right to claim a certain amount of income of the enterprise or company, the right to participate in the management of the corporation, the right to part of the share in the liquidation of the company.

Here is the main difference between the types of debt and equity securities. The former will form the borrowed capital of the corporation, and the latter will already be their own. Another simple explanation. By purchasing a debt security, you are actually lending material to a corporation. And equity is already a direct investment. It is from the funds received for the sale of such securities that the fixed capital of an enterprise or firm will be formed.

Let’s cite Rosneft as an example. The corporation grows, opens up new deposits, develops and expands precisely at the expense of the money of investors who purchased equity securities. In exchange, the company shares with them part of its revenue, and gives the right to manage its activities.

Equity securities are not uncommon on the stock exchange. But they are the most "mysterious" for investors - no one can predict in advance with a guarantee whether such an investment will be profitable in the future.

Varieties of equity securities

Continuing on equity and debt securities. The latter are divided into three large groups:

• Stocks.
• Investment units of various funds.
• Share certificates.

This is a classification proposed by the CBR. Let's look at each of the groups in more detail.

Stocks

The most popular assets from the whole mass of equity and debt securities. They are a confirmation of the owner’s right to participate in the capital of a joint-stock company.

The income of the shareholder is two components:

• Dividends. Their size is difficult to determine in advance. As well as the regularity of payments. By the way, the issuer can choose one of the types of dividend strategy: guaranteed payment, at a floating rate, at a fixed rate.
• The value of the stock itself. Many investors are attracted to resale at a more favorable rate for them.

Equity in the stock market - perpetual paper. It is relevant until the liquidation of the issuing corporation.

The rights of the investor, his participation in the management of the company depends on the number of shares that he holds. The maximum number of assets has been established, which can be held in the same hands.

Inside, they are divided into two more types:

• Ordinary. A liquid security, one of the advantages of which is a higher income on dividends.
• Privileged. Guaranteed accrual of a certain amount of dividends. Upon liquidation of the company, the owners of such shares are the first to receive their share. The main plus is minimal risks.

Stock certificate

It is important not to confuse the asset with a certificate of participation!

What is it in the world of equity and debt securities? A share certificate is a “wholesale” asset that lists the entire list of shares held by the owner. Their numbers, face value, quantity, as well as details of the owner will be indicated here.

Investment share

In the securities market (debt and equity) are better known under the abbreviation UIFs (shares of investment funds). Abroad, such assets are called "mutual." What is it? A security fixing the right of its owner to a share in an investment fund of a corporation.

A bit about modernity. Today, investment funds are very popular, which allows you to invest in real estate. By purchasing a share there, you are thereby buying a share of real estate from several developers at once for a relatively small price. Such an investment is also popular abroad.

But the underlying asset in the form of real estate is just an example. You can buy a mutual fund of a corporation where gold, currency, bonds, oil, indices, companies and much more will act.

Debt securities

Now we turn to the second part of our story. Debt security is a type of financial instrument that helps the issuing company to attract additional finance for business development. It can be issued by either a private company or a state-owned company (or even the state itself).

The objectives of the issuer are:

• Attracting additional funds to capital, the state budget. For the state, this is a way out when implementing federal programs - there is no need to worry about an additional issue of cash.
• As for companies, their goals in issuing debt securities are to raise funds for the implementation of large-scale strategic projects.

For the investor, this is one of the ways to profitably invest free cash. There is more confidence in the securities market, of course, for state and large issuing enterprises than for small private owners.

Thus, a firm or enterprise can invest its free cash. Although the process is somewhat reminiscent of lending, there will be an important difference. For investments in debt securities, the company must have a license for such activities.

Varieties of Debt Securities

There are five key varieties of debt securities:

• Bill of exchange.
• Receipt.
• Bond.
• Mortgage.
• Deposit or savings certificate.

Is the stock a debt security? No, such a common definition is erroneous. As we have already established, shares belong to equity.

Bond

A bond is a debt security, which confirms the fact that its owner invested funds for the benefit of the issuing company. The latter undertakes at the same time to return them within the pre-specified period. It should be noted that the nominal value of bonds can be repaid by the issuer both in cash and in property equivalent.

What is distinctive for the investor, the purchase of bonds always promises him additional income. Its size is pre-fixed in the security. It may be expressed in the payment of interest or the provision of a discount upon purchase.

In simple terms, a bond is a way of lending by an individual to an issuing company. Here are the undoubted advantages of such an investment for an investor:

• Fixed profit as a percentage.
• The ability to predict the return on investment.
• Fixed loan term.
• A small risk of non-repayment of the value of the bond.
• Greater liquidity compared to the same stocks.

Bill of exchange

Refers to securities with an abstract form of obligations. What is the point here? The owner of the bill must pay the person who received this security, at the expiration of the term, the loan granted to him and the interest accrued for the issuance of the debt.

The key difference from a bond is that the value of a bill is returned only in cash. Such a security has legal force only if it is correctly filled in - all details approved by state law must be indicated.

Depending on the functions, bills are divided into commodity and financial. According to the treatment scheme, they are divided into simple, commercial (commodity), transferable, and treasury.

Imagine distinctive bill characteristics:

• Presentation can only be used in payments for a service, work, purchase.
• Financial bills are authorized to issue companies licensed by the Central Bank.
• A simple form is always the participation of two parties. Namely - the bill holder (investor, depositor) and the issuing company.
• Three parties are involved in the translation form. What does it look like? One of the subjects will simultaneously be both a contributor and a credited.
• Treasury bills are issued only by the state.

What is the advantage of investing in this form:

• Minimal risk - repayment here will be indisputable.
• A bill may be transferred to another person.
• It can serve as a type of investment, as well as a tool that is convenient to use in the calculations.

Certificate of deposit

But this variety is a debt obligation of a banking organization to a holder of a certificate of deposit. What does it look like? Upon the expiration of the indicated period, the bank is obliged to return to citizens the value of debt securities, together with the interest accrued under the agreement.

As you can see, such a certificate is one of the analogues of a conventional bank deposit, deposit. It has a key feature of this method of investing. You need to calculate in advance whether the terms for placing cash investments are comfortable for you. Indeed, upon early repayment (at your request) of the depositary certificate, interest on it will not be accrued.

And now let's touch on the main advantages of this investment method:

• You can predict your income, because the interest rate is fixed.
• Good to use as security or guarantee.
• The Bank offers a higher percentage compared to placing money on regular deposits.

But here is a little trick. If all bank deposits must be insured under Russian law, then this requirement does not apply to certificates. Thus, saving on insurance, the bank offers the depositor a higher percentage. For an investor, this is an occasion to open a certificate of deposit only in a reliable bank with a good rating.

Mortgage

A monetary obligation on this security is always backed by collateral. The latter may be property law or a mortgage. In legal relations with it, by the way, in a larger proportion of cases a mortgage is applied.

It is widely used by banks in the provision of various housing lending programs. In fact, transferring a mortgage here will be an alternative to signing a mortgage agreement when closing a credit transaction.

This security is only registered. It is widely applicable among investors who want to invest their free capital in real estate.

A mortgage is considered a type of investment with a long term. In addition, it fully treats highly liquid ones, which allow preserving the capital of its investor.

Government securities

In addition to corporate debt securities, those issued by the state will be no less popular. Here's what we put in this category:

• Savings loan bonds.
• Privatization checks.
• Treasury bills.
• Federal loan bonds.
• Gold Certified Certificates.

Naturally, by issuing these debt securities, the state, first of all, pursues profitable goals. This emission allows you to achieve the following:

• Proper regulation of inflation in the country's economy.
• Stabilization of the national exchange rate.
• Redistribution of capital. It is most often used when it is necessary to “transfer” finances from some sector of the economy to the highest priority.
• A tool to actively regulate the money supply in the country.

Final comparison

So we examined the types of securities - debt and equity. We suggest you compare their features in the table.

We met with one of the most relevant classification of the bulk of securities. This is their division into equity and debt. Each of the groups has its own key features, as well as individual content regarding the assets included.