Types of Market Securities

You have finally entered the market and are ready to invest your money, but where do you start? No matter what brokerage account or type of management you’ve decided to use, you’ll want to first decide what types of investments you want to focus on. With so many options it can be overwhelming to know what is available. That’s why we’ve compiled this helpful guide to help explain what marketable securities are and why they fall into various categories.

What Are Marketable Securities?

Market securities, also referred to as marketable securities, are financial instruments that can be bought and sold on a public stock or bond exchange. Marketable securities are highly liquid assets that can be easily converted into cash. These assets are categorized based on what is being traded. Additionally, marketable securities are differentiated by their structure. There are four broad groups of marketable securities:

• Money market securities: Short-term investments that are focused on exchanging vast amounts of money between financial institutions like banks and the U.S. government. The majority of money market securities are wholesale transactions such as Treasury bills, commercial paper, negotiable certificates of deposit (CDs), repurchase agreements and banker’s acceptance.
• Capital market securities: The most common group of marketable securities. This group is made up of institutions, suppliers, businesses and individuals with capital to lend or invest. Capital market securities include stocks, bonds, real estate investment trusts (REITs), etc.
• Derivative investments: Financial contracts, set between two or more parties. They incur value from an underlying asset, group of assets or benchmark. Common examples of derivative investments are futures, forwards and options. Derivatives can also include credit default swaps and convertible bonds.
• Indirect investments: Investing opportunities that don’t require individuals to purchase the actual asset that ultimately generates the return. Indirect investments often include trusts and hedge funds.

Marketable securities can be either equity or debt securities. Equity securities indicate ownership in the asset, whereas debt securities indicate a loan to the owner of that specific asset. If you’re trying to decide whether investing in equity or debt securities is right for you, remember that debt securities tend to be less risky than equity investments. An easy way to think about debt versus equity securities is debt generally lives within the bond market and equity securities reside in the stock market.

Common Stocks

When you purchase a common stock as a security, you now own a small piece of that company. Because this represents buying an asset with market value, it is considered to be a marketable security. When you buy a share of stock, you become a shareholder. All shareholders receive voting rights and periodic dividends (if you buy from a company that offers dividends) and can earn capital gains based on how well the stock performs in the market.

Stocks as securities can be held for any length of time and can be used for both short- and long-term investments. When compared to other capital market securities, stocks are often the most volatile and risky, although they can also be the most profitable.

Preferred Shares

Preferred shares are a type of security that provides shareholders with a fixed dividend. If a company were to go bankrupt or experience other financial difficulties, those holding preferred shares have seniority over common stockholders with regard to dividend payouts but are junior to those who hold bonds. In this instance, preferred shares are considered to have both equity and debt security properties and are deemed a hybrid capital market security.

Additionally, unlike common stocks, preferred shares have little or no voting rights but often have a higher claim to dividends or asset distribution. Investors who choose to focus on preferred stocks want a safer option than stocks, but more growth potential than bonds.

Bonds

Bonds are units of corporate debt issued by companies and securitized as tradeable assets. They are often categorized as capital market securities. There are many different types of bonds; however, the general definition of a bond is that it serves as an IOU from a business to a lender: The issuer of a bond promises to pay the buyer interest for life of the bond and to repay the principal when it comes due. Bonds often have rules and stipulations the investors must follow.

It’s important to know that the price of a bond is correlated with interest rates. For example, when interest rates go up in a certain time period, bond prices will fall and vice versa. The reason why some investors will focus on bonds rather than stocks is because bonds tend to be less volatile and risky. Additionally, bonds offer stable and consistent returns that investors can count on—similar to other types of fixed income.

So, if bonds are so safe and consistent why wouldn’t everyone invest in them? The main reason why investors may shy away from bonds is because they yield a lower return, may require more money to invest and can default.

Are Corporate and Municipal Bonds Capital Market Securities?

Yes, both corporate and municipal bonds are categorized as capital market securities. Corporate bonds are issued by companies to help finance their ongoing operations or expand their business. When you invest in a corporate bond, you act as a lender for the company. As a lender, you receive a series of consistent, stable interest payments that act as fixed income.

In comparison, municipal bonds are issued by either state or local governments. Municipal bonds as a capital market security are similar to corporate bonds because investors act as lenders and receive a series of interest payments in exchange for lending the government institution their money. However, municipal bonds have potential tax advantages and decreased rates of default compared to corporate bonds.

Exchange-Traded Funds (ETFs)

Exchange-traded funds, also known as ETFs, are collections of securities that trade on an exchange just like common and preferred stocks do. There are numerous indexes that ETFs track, and you can use screeners to see how ETFs are performing compared to other ETFs that track the same index. ETFs can contain different types of capital market securities such as stocks, bonds and commodities.

Investing in ETFs can be a cost-effective way to manage a diversified portfolio while also being one of the most flexible types of securities on the market. Lastly, depending on which ETF you invest in, there may be significant tax benefits from purchasing this type of security.

Mutual Funds

While mutual funds themselves are not marketable securities, when you invest in a mutual fund, you are buying a collection of stocks, bonds and other securities.

Similar to ETFs, mutual funds can be a cost-effective way to diversify your portfolio. This is because mutual funds are funded by a group of investors that have the ability and capital to invest in a wide variety of investments that fall into the capital market security bracket.

What Are Non-Marketable Securities?

Non-marketable securities are assets that aren’t easy to convert to cash. Unlike other investments, non-marketable securities are not traded on the stock exchange and instead are purchased and sold through private or over-the-counter market transactions. The majority of non-marketable securities are government-issued debt instruments that have inherent regulations on how they can be bought and sold. A few common examples of non-marketable securities include:

• S. savings bonds
• Private shares
• State and local government securities
• Rural electrification certificates
• Federal government series bonds

As we mentioned above, some debt investments are often considered to be non-marketable securities because finding a buyer can be difficult or due to federal regulations.

If non-marketable securities aren’t as liquid as their counterparts, why do they even exist? The reason some investments are labeled as non-marketable securities is to ensure stable ownership of the value and money the security represents.

Main Differences Between Marketable and Non-Marketable Securities

The main difference between marketable and non-marketable securities is that the latter are simply not as liquid. Marketable securities are in higher demand and their prices fluctuate with relative volatility across the various exchanges. They also generally carry a higher level of risk when compared to non-marketable securities.

In contrast, non-marketable securities don’t specifically have a market value because their demand doesn’t drastically change like other investments. This is what makes non-marketable securities less volatile and risky for certain types of investors.

How to Invest in Marketable Securities

Understanding what marketable securities are, what types are available for purchase and how they benefit the investor are all key aspects of how to decide which is best for you.

If you’re still confused about which types of marketable securities you’d like to invest in, it’s important to consider a few factors such as: investment goals, selection process and risk tolerance.

For example, if you want to select individual companies to invest in, you may want to stick to common or preferred stocks and avoid ETFs or mutual funds. However, if you’d like to focus on capital market securities that are less risky and volatile, maybe bonds would be a good way to go. If you’re looking for significant returns or dividends without having to choose for yourself, stocks, mutual funds and ETFs are all good options of available marketable securities.

At the end of the day, you will need to decide on your own which marketable securities you will want to put your money into. Thankfully, there are organizations like the American Association of Individual Investors that are focused on providing investors with comprehensive education, resources and tools to make those decisions.

By subscribing to A+ Investor, members gain access to countless stock screens, grades and rankings that can help them build a diversified portfolio with various marketable securities. AAII also offers in-depth articles, webinars and other resources that are focused on helping investors choose the right capital market securities that will fit their individual needs.

Learn how to manage a diversified portfolio with a variety of marketable securities by subscribing to A+ Investor today.