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What is a Financial Security?

The Baltimore and Ohio Railroad issued bonds in the 19th Century to fund the building of its rail lines.
Stocks, which can be traded on an open market, are a type of equity security.
Company stock is a form of equity security.
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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 18 October 2014
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A financial security is some type of financial instrument that is negotiable and has a recognized financial worth. Usually referred to simply as securities, they can take on several forms. Generally, one will have the potential to generate some additional return above face value for either the holder of the issuer of the security.

One common example is a debt security. Securities of this type primarily include bonds, debentures, and banknotes. A bond issue normally provides a fixed return above the purchase price or face value of the instrument. Debentures are written acknowledgments of debt owed and can be used by the lender to designate an asset. Banknotes are essentially promissory notes that can be called at any time and as such also represent a negotiable asset.

Equity securities are a second classification. Within this category, the financial security may be stock of some type, such as common or preferred stocks. All types of stock represent a financial asset that may be sold or used as collateral if necessary.

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A security may be issued by a number of different entities. Federal government agencies or even local municipal governments may choose to issue bonds as a means of financing an upcoming civic improvement project. Commercial companies often issue shares of stock to be purchased and sold on the open market. Even banking organizations that operate on an international basis may issue some form of financial security. While this is not always the case, a security issued by a government entity is likely to carry an interest rate that is lower than one issued by a commercial company.

In most cases, the purpose of issuing a financial security is to generate new capital in some form. This is accomplished by attracting people who wish to invest in the security, due to the potential for generating new capital in the form of interest. Some types can guarantee a return over time, such as with a bond issue. Other examples, such as a stock issue, carry a greater degree of risk, but they usually also carries a higher potential to generate additional returns.

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Discuss this Article

Crispety
Post 2

Icecream17- I agree that municipal bonds are a good investment, but they are not for everyone.

I prefer securities like index mutual funds. The offer a good rate of return and carry very low fees which puts more money in my pocket.

icecream17
Post 1

I would like to add that Municipal bonds are a great security to invest in because they offer tax-free income. Municipal bonds are extended to the general public when a city or municipality needs to raise money for a specific goal.

The best municipal bonds are AAA rated general obligation bonds. Generally municipal bonds are thought to be less risky than stocks because city and state governments back them.

Usually to invest in a municipal bond most investors need to have a minimum of $10,000 and some funds even require $25,000 as the minimal point of entry.

The bond offers a specific yield that is paid to the investor in two six month installments. Many individuals with high incomes look to municipal bonds as another way of generating income without tax penalties.

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