What are Investment Securities?

Investment securities are purchased by the investors, with or without any middlemen or agents, only for investment and to hold for the long term. These are reflected as non-current investments in the financial statements and include 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 a short-term price change

Note: It is the intention of the securities buyer, which matters when classifying the security as investment security or trading securityTrading SecurityTrading securities are investments in the form of debt or equity that the company’s management wants to actively purchase and sell to make a profit in the short term with securities they believe will increase in price. These securities can be found on the balance sheet at the fair value on the balance sheet date.read more. Security has a 10-year maturity period and 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

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A) Traditional Investment Securities

It is the earliest form of investment from a 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 used 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 gold prices.

Purchasing, developing, operating, maintaining, selling, and renting real estate properties has been and is one of the traditional forms of investment. The reason behind investing in real estate is to gain in the form of rentals (which is like regular cash flowCash FlowCash Flow is the amount of cash or cash equivalent generated & consumed by a Company over a given period. It proves to be a prerequisite for analyzing the business’s strength, profitability, & scope for betterment. read more for managing day to day operating expenses) and to gain from price rise (benefit for holding the property for long term).

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

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 the case of preference shares) are considered as fixed incomeFixed IncomeFixed Income refers to those investments that pay fixed interests and dividends to the investors until maturity. Government and corporate bonds are examples of fixed income investments.read more bearing securities. Return on these securities would not be affected by any market factors. Lower risk is involved in such types of securities.

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 riskCredit RiskCredit risk is the probability of a loss owing to the borrower’s failure to repay the loan or meet debt obligations. It refers to the possibility that the lender may not receive the debt’s principal and an interest component, resulting in interrupted cash flow and increased cost of collection.read more of the issuer of these securities. Various investment alternatives are available under this category:

  • Government SecuritiesDebentures of Private SectorPrivate SectorThe private sector is a section of the national economy that the government does not own. The business conducted under this sector is carried out by companies or entrepreneurs who focus on profit maximization and customer satisfaction.read more companiesPublic sector unit (PSU) bonds

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 debentureDebentureDebentures refer to long-term debt instruments issued by a government or corporation to meet its financial requirements. In return, investors are compensated with an interest income for being a creditor to the issuer.read more and bondholders.

Securities other than fixed income bearing securitiesFixed Income Bearing SecuritiesFixed income investment is a type of investment in which the investor receives a fixed and relatively stable stream of income in the form of dividends or interest over a period of time. Companies and governments typically issue fixed investments in the form of debt securities.read more are considered variable income-bearing securities. Return on these securities is not fixed and varies because of the changes in the market factors.

Common stockholders are the owners of the company. It means such stockholdersStockholdersA stockholder is a person, company, or institution who owns one or more shares of a company. They are the company’s owners, but their liability is limited to the value of their shares.read more 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 secondary marketsSecondary MarketsA secondary market is a platform where investors can easily buy or sell securities once issued by the original issuer, be it a bank, corporation, or government entity. Also referred to as an aftermarket, it allows investors to trade securities freely without interference from those who issue them.read more.

Mutual fundsMutual FundsA mutual fund is a professionally managed investment product in which a pool of money from a group of investors is invested across assets such as equities, bonds, etcread more, 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 appetiteRisk AppetiteRisk appetite refers to the amount, rate, or percentage of risk that an individual or organization (as determined by the Board of Directors or management) is willing to accept in exchange for its plan, objectives, and innovation.read more of 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 for 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.

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 it from the following articles –

  • Investment RiskInvestment Income TypesPortfolio Investment DefinitionLong Term Investments Types