In a nutshell, a security is a financial asset that represents either an ownership stake or a debt stake in a company. The owner of an equity security becomes part owner of a particular company by purchasing shares of the company's stock. A debt security, on the other hand, is a fancy name for a bond. When investors own debt securities, it means they have purchased a bond, or essentially loaned money to a company or government entity, which has promised to repay the loan with interest.
An equity security is a financial asset that entitles the owner to a claim on the profits of a particular company. The owner of the equity security receives a dividend check based on the number of equity shares he owns. He also has the right to sell his shares to either take profits or cut losses at any time. Owners of equity shares also usually have voting rights that give them a proportional vote in certain major corporate decisions.
Companies and government entities sometimes raise money to finance their operations by offering debt securities -- also known as bonds -- for sale. When you purchase a bond, you are lending money to that company or government entity. In return for the loan, the bond issuer provides you with a debt security in which it promises to repay the amount you have loaned it with interest on a specific future date. Bond owners have no ownership stake in the company or government entity. One of the reasons companies prefer to issue bonds instead of stock to the public is to avoid giving equity in the company to investors in exchange for the money it needs.
The ownership of either debt or equity securities represents wealth. If you were to create a net worth statement that lists all your financial assets in one column and your debts in another, you would definitely list any debt securities and equity securities that you own in the financial asset column.
Many items of value can qualify as financial assets on a net worth statement, such as real estate, cars and equipment. But debt and equity securities have their advantages as financial assets. Debt and equity securities can be quickly and easily converted to cash, which makes them a very liquid form of financial assets.
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