Security

Business, Legal & Accounting Glossary

Definition: Security



Full Definition of Security


Security in economics is a condition that provides protection from a financial crisis. Security is often referred to as a flexible instrument that represents financial value. Security is recognized as an investment instrument that is negotiable and flexible in nature. Major forms of security that offer financial protection includes shares of business stocks, bonds issued by corporate houses or government agencies, mutual funds and stock opinions.

A security is a financial instrument, but not all financial instruments are securities. When people think of securities, it is usually stocks or bonds that come to mind. If we are very liberal with our interpretation of what constitutes a stock or bond, this is a reasonable definition—every security is some sort of equity or debt interest.

The only precise definition of security is that a security is whatever US law says it is. In the depths of the Great Depression, Congress passed two acts:

  • the 1933 Securities Act, and
  • the 1934 Securities Exchange Act.

The Securities and Exchange Commission (SEC) is the primary regulator of US securities markets. The acts granted certain securities exemptions from most SEC oversight. These are called exempt securities. Today they include

  • Treasury and municipal securities,
  • commercial paper and bankers acceptances with terms up to nine months, and
  • private placements.

A financial interest is said to be securitized when it is legally structured or packaged as a security. This terminology is most commonly used in the context of securitizations.

The 1933 and 1934 Acts define what is or is not a security. Both acts contain similar language. The 1933 act states

The term “security” means any note, stock, treasury stock, security future, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a “security”, or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing.

Because many of the terms in this definition are themselves not clearly defined, there may be uncertainty about whether specific instruments or transactions legally are securities. In the 1940 case SEC vs. WJ Howey Co., the Supreme Court decided that a sale of a portion of an orange grove bundled with a contract to harvest the oranges and distribute profits did constitute a security. In that case, the court concluded that a transaction should be subject to securities laws if

… the scheme involves the investment of money in a common enterprise with profits to come solely from the efforts of others.

Conventionally, common stock, preferred stock, bonds, securitizations, shares of mutual funds and structured notes are all considered securities. Currencies, bank loans, most insurance policies, lottery tickets and derivatives are not securities. Futures are a special case. While they were included in the 1933 Act’s definition, they are regulated by the Commodity Futures Trading Commission (CFTC) rather than the SEC. Most practitioners would not consider them to be securities.

Years ago, John Hull entitled the first and second editions of his book on financial engineering Futures, Options, and Other Derivative Securities. By the third edition, he realized his mistake. It and subsequent editions have been entitled Futures, Options, and Other Derivatives. It is a testament to the book’s influence that others copied the error. Even today, you occasionally hear derivatives erroneously called securities.

Outside the US, the term security is used much as described here, although different legal jurisdictions may not conform to definitions specified by US law.

Type Of Securities To Invest In

Securities can be categorized into debt securities that include bonds, debentures and equities, each of which is used either as a financial safety or an investment. Explaining each of these types of securities will aid in understanding the concept of security. 

Bonds

This is referred to as a debt investment in which a corporate house or any government agency borrows money from an investor for a specified period of time. A bond market has fixed interest payment and so the bond market is sometimes known as the fixed-income market. Corporate bonds, municipal bonds, and U.S. Treasury bonds are some of the popular bonds circulated in the economy. The Bond market is unpredictable, still, bond investors are of the view that there will be soon downfall in long-term interest rates.

Debenture

This is another type of debt security which is represented by a certificate of agreement of loans between the issuer and the investor. The certificate is issued by any company or government agency that carries a guarantee that any debenture holder will get a fixed return after a specified time period. The return from debentures mainly includes the principal amount along with interest amount.

Share

Shares are referred to as a part of ownership in a company in which the investors invests money. Several corporate houses issues shares that carry a policy of ownership in exchange of which the investors pay a certain amount of money.

Security is depended on certain regulations that are imposed by the regulatory structure of the government of any country. The securities issued by any company have to meet various restrictions imposed by the government. A certificate or an entry in an electronic book is representative of holding a security.


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Definition Sources


Definitions for Security are sourced/syndicated and enhanced from:

  • A Dictionary of Economics (Oxford Quick Reference)
  • Oxford Dictionary Of Accounting
  • Oxford Dictionary Of Business & Management

This glossary post was last updated: 16th April, 2020 | 2 Views.