Investment securities are financial assets that are tradable in financial markets such as equities and fixed income instruments. These are purchased to hold them for a longer period of investment. This is in contrast to securities that are purchased by broker-dealer or other financial intermediately for resale short-term speculations. Investment securities are subject to governance via article 8 of the Uniform Commercial Code (UCC).
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Features of Investment Securities:
- Risk Factor – risk is an inherent characteristic of every investment. Risk refers to the loss of principal amount, delay or non-payment of capital or interest, the variability of return, etc. every investment differs in terms of risk associated with them. However, less risky investments are most preferred ones by investor
- Returns – Returns refer to income expected from the investment done. It is a key objective for doing investment by investors. The investment provides benefits to people either in the form of regular yields or through capital appreciation.
- Safety – It refers to the surety of return or protection of principal amount without any loss. Safety is an important feature of every investment tool that is analyzed before allocating any fund to it
- Income stability – It refers to the regulation of income without any fluctuations. Every investor wants to invest in such assets which provides return consistently.
Hene, these are the various features of Investment securities there are many more features such as safety of principal, capital appreciation, etc
Types of Investment Securities:
- Equity shares:
Equity stakes can be in the form of preferred or common shares although they must provide a measure of safety in this case. High-risk, high-reward securities, such as Initial Public Offering allocations or small gap growth companies, might not be appropriate for investment securities. Some companies offer dual-class stock, which provides distinct voting rights and dividend payments.
- Debt securities:
Debt securities can take the common form of secures or unsecured debentures. Secured debts are backed by companies as collateral. Secured debt would be preferred as it is safe and less risky. Treasury bonds, T-bills are also an option for banks’ investment security portfolio.
Derivatives are a financial instrument that depends on the movement of the underlying asset. There are various types of derivatives such as futures, forwards, options (Call & Put), SWAPS. These are usually used for hedging strategies to offset risks
Factors to be Considered Before Investing:
- Individual risk appetite:
One’s gain is others’ loss in investment. What works for one may not necessarily work for another person. That be be not the best investment choice for him. The main reason behind this could be everyone has their risk tolerance, which may lead to the selling of investment during volatile periods.
- Risk vs Reward:
Any kind of investment would involve a certain degree of risk. What is important is that you take on calculated risk and stick to the risk/reward ratio suitable for your risk appetite. A risk/reward ratio compares the expected returns of an investment to the amount of risk undertaken to invest the asset.
- Time horizon:
One of the key distinctions between trading and investing in the latter usually takes on a longer time horizon. The investment horizon determines the investor’s income requirements and desired risk exposure, which then helps to choose the appropriate investment product.
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Investment in securities is good and is the best if done for the long term as returns will be high and are comparatively safer to invest.
Author – Hariharan Krishnan
About the Author – Hariharan Krishnan is currently in second year BAF and is also doing FRM part 1. He is passionate about financial markets and loves to play chess and outdoor games.