A financial security is some type of financial instrument that is negotiable and has a recognized financial worth. Usually referred to simply as securities, they can take on several forms. Generally, one will have the potential to generate some additional return above face value for either the holder of the issuer of the security.
One common example is a debt security. Securities of this type primarily include bonds, debentures, and banknotes. A bond issue normally provides a fixed return above the purchase price or face value of the instrument. Debentures are written acknowledgments of debt owed and can be used by the lender to designate an asset. Banknotes are essentially promissory notes that can be called at any time and as such also represent a negotiable asset.
Equity securities are a second classification. Within this category, the financial security may be stock of some type, such as common or preferred stocks. All types of stock represent a financial asset that may be sold or used as collateral if necessary.
A security may be issued by a number of different entities. Federal government agencies or even local municipal governments may choose to issue bonds as a means of financing an upcoming civic improvement project. Commercial companies often issue shares of stock to be purchased and sold on the open market. Even banking organizations that operate on an international basis may issue some form of financial security. While this is not always the case, a security issued by a government entity is likely to carry an interest rate that is lower than one issued by a commercial company.
In most cases, the purpose of issuing a financial security is to generate new capital in some form. This is accomplished by attracting people who wish to invest in the security, due to the potential for generating new capital in the form of interest. Some types can guarantee a return over time, such as with a bond issue. Other examples, such as a stock issue, carry a greater degree of risk, but they usually also carries a higher potential to generate additional returns.
