Securities

A security is a fungible, negotiable interest representing financial value. Securities are broadly categorized into debt and equity securities. The company or other entity issuing the security is called the issuer.

Securities may be represented by a certificate or, more typically, by an electronic book entry interest. Certificates may be bearer, meaning they entitle the holder to rights under the security merely by holding the security, or registered, meaning they entitle the holder to rights only if he or she appears on a security register maintained by the issuer or an intermediary. They include shares of corporate stock or mutual funds, bonds issued by corporations or governmental agencies, stock options or other options, limited partnership units, and various other formal investment instruments that are negotiable and fungible.

The Securities Market

Primary and Secondary Market

The public securities markets can be divided into primary and secondary markets. The distinguishing difference between the two markets is that in the primary market, the money for the securities is received by the issuer of those securities from investors, whereas in the secondary market, the money goes from one investor to the other. When a company issues public stock for the first time, this is called an Initial Public Offering (IPO). A company can later issue more new shares, or issue shares that have been previously registered in a shelf registration. These later new issues are also sold in the primary market, but they are not considered to be an IPO. Issuers usually retain investment banks to assist them in administering the IPO, getting SEC approval, and selling the new issue. When the investment bank buys the entire new issue from the issuer at a discount to resell it at a markup, it is called an underwriting, or firm commitment. However, if the investment bank considers the risk too great for an underwriting, it may only assent to a best effort agreement, where the investment bank will simply do its best to sell the new issue.

In order for the primary market to thrive, there must be a secondary market, or aftermarket, where holders of securities can sell them to other investors for cash, hopefully at a profit. Otherwise, few people would purchase primary issues, and, thus, companies and governments would be unable to raise money for their operations. Organized exchanges constitute the main secondary markets. Many smaller issues and most debt securities trade in the decentralized, dealer-based over-the-counter markets.

In Europe, the principal trade organization for securities dealers is the International Capital Market Association. In the U.S., the principal organization for securities dealers is the Securities Industry and Financial Markets Association. The Bond Market Association represents bond dealers globally.

Public Offer and Private Placement

In the primary markets, securities may be offered to the public in a public offer. Alternatively, they may be offered privately to a limited number of qualified persons in a private placement. Often a combination of the two is used. The distinction between the two is important to securities regulation and company law. Privately placed securities are often not publicly tradable and may only be bought and sold by sophisticated qualified investors. As a result, the secondary market is not as liquid.

Another category, sovereign debt, is generally sold by auction to a specialized class of dealers.

Listing and OTC Dealing

Securities are often listed in a stock exchange, an organized and officially recognized market on which securities can be bought and sold. Issuers may seek listings for their securities in order to attract investors, by ensuring that there is a liquid and regulated market in which investors will be able to buy and sell securities.

Growth in informal electronic trading systems has challenged the traditional business of stock exchanges. Large volumes of securities are also bought and sold "over the counter" (OTC). OTC dealing involves buyers and sellers dealing with each other by telephone or electronically on the basis of prices that are displayed electronically, usually by commercial information vendors such as Reuters and Bloomberg.

There are also eurosecurities, which are securities that are issued outside their domestic market into more than one jurisdiction. They are generally listed on the Luxembourg Stock Exchange or admitted to listing in London. The reasons for listing eurobonds include regulatory and tax considerations, as well as the investment restrictions.

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