Security

A security is one of:

  • An asset that has been pledged to raise a loan - such as a house used to secure a mortgage
  • A financial instrument that entitles its owner to some future stream of cash flows.

The second meaning is what matters in an investment context. The purpose of a security is to allow fractional ownership or other rights to be traded. This may be ownership of companies (shares), debt (bonds), contractual rights (derivatives) or other entitlements to streams of cash flows.

A financial security may give its holder other rights in addition to the stream of cash flows. For example, shareholders are usually entitled to vote at company meetings.

It is possible to create securities from a wide range of cash flow streams other than the traditional repayments of debt, or the distribution of profits. Such creation of a security from such a stream of cash flows is called securitisation.

Copyright Graeme Pietersz © 2005-2016