Investment Securities

Last Updated :

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Blog Author :

WallStreetMojo Team

Edited by :

Ashish Kumar Srivastav

Reviewed by :

Dheeraj Vaidya, CFA, FRM

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What Are Investment Securities?

Investment securities are purchased by the investors, with or without any middlemen or agents, only for investment and to hold for the long term. These are reflected as non-current investments in the financial statements and include fixed income and variable income-bearing securities. On the other hand, Trading Securities are those securities that are purchased for intra-day transactions or the purpose of which is to gain from a short-term price change

Investment Securities

It is the intention of the securities buyer, which matters when classifying the security as investment security or trading security. Security has a 10-year maturity period and can still be classified as trading security if the purchaser of the security intends to hold it for a short period (maybe to gain from the price change).

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Investment Securities Explained

Investment securities are the financial instruments that can be traded. Investors purchase these secutities and remain invested for long term with the plan to earn a return after a few years.  These securities might be stocks or fixed income instruments.

Investors may be individuals, banks, or corporates who aim to use them as investment opportunities to earn returns. For banks, they are an income source, apart from loans given to borrowers for various purposes. Such financial investment securities can also be used as collateral for mortgages. They may be directly purchased from the primary and secondary market or through a middleman like a broker or a dealer.

Types

Investment Securities Types

A) Traditional Investment Securities

#1 - Gold

It is the earliest form of financial investment securities from a time when none of the developed investment markets were available for the investors. It was used as an alternative to money in ancient times and was being started used as an investment when its demand-supply balance got disturbed. Central banks and the International Monetary Fund have a great role to play in determining gold prices.

#2 - Real Estate

Purchasing, developing, operating, maintaining, selling, and renting real estate properties has been and is one of the traditional forms of investment. The reason behind investing in real estate is to gain in the form of rentals (which is like regular cash flow for managing day to day operating expenses) and to gain from price rise (benefit for holding the property for long term).

#3 - Commodities

Commodities were used as collective investment securities to gain from the demand and supply mismatch as these are seasonal. The main costs incurred are storage costs, and the gain arrives from convenience yield.

B) Modern Investment Securities

#1 - Fixed Income Bearing Securities

Those securities which will generate fixed cash flow either by way of interest (particularly on debentures/bonds) or by way of a fixed percentage of dividend (in the case of preference shares) are considered as fixed income bearing securities. Return on these securities would not be affected by any market factors. Lower risk is involved in such types of securities.

#2 - Debentures/Bonds

These are long-term investment options carrying fixed income based on the rate of interest. The risk of such types of securities is dependent on the type of issuer. The major risk faced is the credit risk of the issuer of these securities. Various investment alternatives are available under this category:

  1. Government Securities
  2. Debentures of Private Sector companies
  3. Public sector unit (PSU) bonds
#3 - Preferred Stock

Preferred Stock is the stock the holders of which carry preferential rights over common stock or equity in two circumstances:

  1. Payment of dividend, i.e., these stockholders get a fixed rate of dividends and get paid before any dividend is paid to the common stockholders.
  2. In the event of liquidation, these shareholders have preferential rights of payment of capital before anything is distributed to the common stockholders, but after debenture and bondholders.
#4 - Variable Income Bearing Securities

Securities other than fixed income bearing securities are considered variable income-bearing securities. Return on these securities is not fixed and varies because of the changes in the market factors.

#5 - Common Stock or Equity

Common stockholders are the owners of the company. It means such stockholders have ultimate rights over the profits and assets of the company. Income on such stock is variable depending on the risk, rate of return, liquidity, growth, marketability, etc. In case of sale of investment securities, such investments are risker as well as more liquid investments. These collective investment securities can easily be traded in primary as well as secondary markets.

#6 - Mutual Funds

Mutual funds, in simple terms, is the portfolio of various securities. It is a fund created to invest in various equity or debt securities or a mix of both and funded by its unit-holders. Unit-holders are the investors who are the ultimate owners of the mutual fund. The idea is to diversify risk as the risk gets diluted by investing in a portfolio rather than in a single stock.

Investment-Securities

Example

Let us consider an example, where Max is a 45 year old individual who is planning to make a long term investment for his two children. He decides to design a portfolio which will have a combination of stocks of some established companies, a few good mutual funds giving consistent positive returns for the last five years and also some government bonds that will give a fixed risk free return.

Thus we see that his investment securities range from moderately risky ones to safe investments that will give fixed returns. Such portfolio selection should be made as per the risk appetite and future purpose of the investment keeping in mind the time in hand.  

Factors To Consider Before Buying Securities

Factors to be considered for the acquisition of investment securities:

#1 - Risk Appetite

The risk appetite of every investor is different from another. The risk appetite depends on the investor's income, personal liabilities or expenses, and savings expenses, and savings of the investor. For example, a young investor with no personal liabilities to entertain and who earns and saves goods his risk appetite is more than an investor with more fixed personal liabilities and thus saves less money.

Investors having a good risk appetite can invest in more risky securities, say equity, than investors having a low-risk appetite. They may consider investing in fixed-income securities, which are usually not short-term investment securities.

#2 - Lock-in Period

Investors who expect the urgent need for money or liquidity will invest in short term investment securities that are more liquid securities than investors who can lock in their investment. The motivator to investors locking their securities for a longer term is the extra return generated in the name of liquidity lost. Thus there is no In case of sale of investment securities before maturities in such cases.

#3 - Personal Traits

Personal traits of an investor such as age, tradition, etc. also determine the type of investment securities to be acquired. A young person can take the risk and will invest in long-term securities rather than a retired employee whose primary aim is to generate monthly cash flow to meet his day-to-day expenses.

#4 - Investment Objective

If the objective is to earn regular cash flow, then dividend or interest-paying securities are better options, whereas if the objective is to earn from price rise, growth stocks need to be considered.