Financial Instruments: Why They Are Called Securities

The term ldquo;securitiesrdquo; is used to describe financial instruments that are legally backed, tradable, and regulated to provide investors with a sense of security and liquidity. Understanding why financial instruments are referred to as securities sheds light on their important role in modern finance.

Legal Protection

One of the primary reasons financial instruments are called securities is due to their legal backing. Securities are often supported by legal contracts that provide specific rights to the holder. For example, stockholders have the right to receive dividends or interest payments, and they also have the right to vote on corporate matters. These legal protections offer investors a sense of security, knowing that they have rights and can claim their entitlements through the governed legal system.

Tradability

The second key characteristic that distinguishes financial instruments as securities is their tradability. Securities can be bought and sold in financial markets, providing liquidity to investors. This liquidity allows investors to easily convert their holdings into cash, making it a crucial aspect of financial transactions. This feature ensures that investors can access their funds when needed, providing flexibility and security.

Regulation

A third reason financial instruments are called securities is because they are subject to regulation by government authorities. In the United States, the Securities and Exchange Commission (SEC) ensures that securities are traded fairly and transparently. This regulatory framework adds another layer of security for investors, shielding them from fraudulent activities and ensuring that they are treated fairly in financial markets.

Diverse Types of Securities

The term ldquo;securitiesrdquo; encompasses a wide range of financial instruments, including stocks, bonds, derivatives, options, and more. Each type of security offers different financial features and risk profiles, but they all share the common characteristic of representing financial value. Stocks and bonds are perhaps the most well-known, while derivatives and options offer more complex financial instruments to manage risk and speculation.

Financial Assets as Securities

Financial assets are generally referred to as assets, but when these assets are offered as securities for any commitments or investments, they are treated differently. Stocks, bonds, Treasury bills, notes, and mortgage-backed securities become securities because they are not just plain financial assets. They have a contractual claim which reflects a right to ownership in an asset or an income right. These assets are liquid and can be converted into cash, making them valuable for investors.

Conclusion

Financial instruments are referred to as securities due to their legal backing, tradability, and regulatory framework. They offer a diverse range of financial products, each with unique characteristics and risk profiles. By understanding why financial instruments are called securities, investors can make more informed decisions and protect their financial future.

Keywords: financial instruments, securities, financial assets