Security finance are the financial instruments that are negotiable and holds the value or money. It can be put in place of money. Securities can be bonds or shares which attains the ownership position in creditor relationship either with government or any corporation and publicly traded companies respectively.
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Securities serves as an investment and ways of making the governments or corporations for raising capital in financing of their business or affairs. Corporations get capital by selling of shares, stocks and bonds to investors and the individual that issues the security finance are usually referred to as the issuer.
The main essence and primary reason of issuing security is to raise funds in financing the affairs of the company and also to invest in increasing the capital gain of the company. The investors at the end of the maturity term in debt financing collect his interest rate and the principal while the investors in equity finance has his profit and share from the capital gain.
There are two basic categories of securities which are the equities and debts.
Equity security is the security use in equity financing which represents the ownership interest received by the shareholders of the company or corporation. The equity is got in from shares sold by a corporation in financing the affairs of the corporation. The shares can of common stock or preferred stock.
Dividends which is the profit given to the investors are issued by the equity holders and the holders are not usually entitled to a regular payment. They give the profit which is dividends from the gain made by the corporation. The equity holder is the owner of the company that issues out shares to investors in other to cater for the affairs of the company or might be in the position of controlling most affairs of the company by voting rights.
The shareholders and the equity holder share the residual capital gain when bankruptcy occurs in the corporation.
This is usually occur in debt financing when the owner of the company issues out bonds to be bought by investors to finance the affairs of the company. Debt security is the money that was got from the sale of bonds to the investors and this money must be paid back with interest rate called coupon rate at the maturity date. Debt securities can be corporation bonds or government bonds and they can also be referred to as collateral security.
This debt security ensures and gives the holder which is the owner of the corporation n entitlement to pay the interest rate and the principal. Debt securities gives the holder opportunity to have either of variable interest rate or fixed interest rate. The fixed interest rate makes the holder of the debt security to pay the interest at the end of agreed term while the variable interest rate makes the debt security holder to pay a particular amount of interest rate at the beginning and towards the end, the holders pay another interest rate.
For example, in variable interest rate, you might get to pay low interest rate at the beginning and towards the end the interest gets higher. We have both secured and unsecured debt security. The secured debt security is backed up by a collateral while the unsecured debt security does not have back up.
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There is also another type of security finance which most company holds today, this is a hybrid security. This hold both the debt security and the equity security. This is usually held by companies that practice both debt financing and equity financing at the same time that is they have their bond sold to investors and also sell out there shares to investors and this investor are called bondholders and shareholders respectively.
Examples of hybrid securities can be coupon rate which is the interest paid for issuing bonds, equity warrants which gives every investors that are shareholders the opportunity to buy a specific amount of stocks within the company within a particular period of time, convertible bonds which gives bondholders the right to convert their bonds to shares and this gives the bondholders the opportunity to partake in the running of the business and lastly a preference shares which gives makes the interest rate and dividends or any returns in the company to be prioritize over others.