What are the differences between securities, stocks, and shares?

A critical part of learning the stock market involves understanding the jargons associated with the market and not getting confused one with another. A very common confusion is the usage of the words securities, stocks, and shares. If you are new to the market, you may find it confusing and unable to differentiate between these 3 terms.

Share vs Stock

Let us differentiate them first. For most purposes, both terms are interchangeably used and they mostly mean the same. In the strictest sense though, there are some differences.

A stock represents partial ownership of the company. Depending on how the stock was issued, an investor can buy and sell stocks of a company to generate profits or receive dividends if the company gives them. The investor can also participate and vote in the shareholder meetings. Buying a stock makes the investor a partial owner of the company.

A share is the smallest unit of a company’s stock. In other words, stock can be bought at multiples of shares. So, someone would say “I bought 100 shares of ABC” or “I bought stock in ABC”, but not “I bought shares in ABC” or “I bought 100 stocks in ABC”.

Moreover, when the term stock is used, it refers to the common stock of a company. However, while using the term shares, it can also refer to other types of investments like mutual funds.

Securities

By definition, securities are tradable financial instruments. It represents ownership or equity in a company or the right to collect the debt. Security is an investment that has a value that the holder may sell to earn profit. Most securities can be bought or sold on the secondary market or any exchanges.

By that definition, we can summarise that a stock is a type of security. However, securities are not limited to stocks.

Types of Securities

Securities can be generally divided into three categories.

1. Equities

2. Debt

3. Derivatives

Let us look at each one of them

Equity Securities

Equity securities are financial assets that represent ownership in a company. Stock (generally common stock) is an equity security. Equity securities give you a claim on a percentage of the assets and earnings of the company you have invested in. By nature, they potentially provide a higher return on investment compared to other securities, at a higher rate of risk. Mutual Fund investments can also be considered as equity securities as long as their constituents are equity securities.

Debt Securities

Debt Securities are assets that represent a loan. It is a contract the borrower issues to the lender. Debt securities involve terms of the principal amount, interest rate, maturity date, etc. In simple words, by investing in debt securities, the investor is lending money to the corporation that has issued said security entitling the investor to collect interest and the principal amount at the end of the term. Bonds are one of the most common debt securities. One can buy or sell bonds in the market just like common stocks. Bond prices go down typically when interest rates are high and go up as the interest rates go down. Debt securities are considered safe investments with less risk, and of course fewer returns. It is often recommended to have some allocation of total investment be made in debt. Debt securities can be either secured or unsecured. Secured means that the loan is backed by some collateral whereas unsecured debt instruments have no collateral, which means if the corporation goes bankrupt, you may not get your money back.

Derivative Securities

Derivative securities are a type of investment instrument that represents an agreement to buy or sell an asset at a fixed price by a specified date. The asset in reference may be a commodity, property, or other security. Futures contracts, options swaps, mortgage-backed securities, etc. are all examples of derivative securities. Often, derivatives are used as an investment strategy called hedging, to help minimize financial risks or losses or to gain profit from price variations due to speculations.

Derivative derives their value from a spot price which is called the underlying. If the value of the underlying asset changes, the value of the derivative also changes. This allows investors to buy or sell the stock of the derivative to make use of the fluctuations to earn profits.

By nature, derivative instruments are riskier with a potentially higher return on investment. Derivative securities also require a larger capital compared to other securities.

Derivative Trading in India

Indian stock market mainly has two types of derivative trading instruments which are futures and options. In a futures contract, money transfer takes place while entering the contract. It requires the buyer to execute the agreed transaction on the said date. In options, the buyer pays the premium, which gives the buyer a right to buy at the expiration date. The key difference between futures and options is that, unlike futures, an options contract does not ‘require’ the buyer to buy at the expiration date. The seller of the options contract will always receive the premium and hence is obligated to sell if the buyer is willing to buy.

Call vs Put Options

Options are generally of two kinds. A call option gives the buyer a right (but not obligation) to buy the agreed asset on the expiration date. A put option gives the buyer a right (but not obligation) to sell the agreed asset on the expiration date. In both cases, the seller, who is the party at the opposite end, is called a writer of the option. The writer will always get the premium regardless of whether the buyer executes their right, and is obligated to satisfy the contract.

By now you have learned the difference between the terms share, stock, and securities and also have dived into the different types of securities available for investment. More often than not, we only hear about the common stock and not about the other types of securities. Even if we do, non-equity securities can feel complex and overwhelming. One major reason for this is that the stock market plays the role of an economic indicator. Sectoral hype is often identified by observing movements in the stocks of a specific sector. This is the reason why stocks are discussed far more than other securities causing us to have less information on them. Regardless of that, we hope this has been fruitful in opening up a vast area of investment opportunities for you. You can learn more about it with the help of stock market apps available in the market.