Securities

Securities are tradable financial instruments that represent either a share of ownership in an entity or a claim to be repaid money, and that can be bought and sold between investors. The best-known examples are company shares, government and corporate bonds, and units in investment funds. Companies and governments issue securities to raise capital; investors buy them for income, growth or both.

The word has a precise legal meaning as well as an everyday one. Whether something counts as a security decides whether its issuer must register it, publish a prospectus and follow anti-fraud and disclosure rules. In the United States that question is answered by statute and court tests and enforced by the Securities and Exchange Commission (SEC); in the UK and the EU, by the Financial Services and Markets Act 2000 and by MiFID II's category of "transferable securities".

Think of a security as a formal IOU or a slice of a cake that you can hand to someone else. If you lend money to a town to build a bridge and get a certificate promising repayment with interest, that certificate is a debt security. If you put money into a bakery and get a certificate saying you own one hundredth of it, that is an ownership security.

What makes both of them "securities" is that they are standard pieces of paper (today, mostly computer records) that strangers can buy and sell without renegotiating the deal. Because buyers cannot inspect the bakery themselves, the law insists the bakery tells the truth about its business before selling the slices.

Section 2(a)(1) of the US Securities Act of 1933 gives a long list: any note, stock, treasury stock, bond, debenture, evidence of indebtedness, certificate of interest in a profit-sharing agreement, investment contract, and options on any of these, among others. The Securities Exchange Act of 1934 uses a near-identical list. The catch-all term "investment contract" was interpreted by the Supreme Court in SEC v. W.J. Howey Co. (1946), giving the Howey test: an investment of money in a common enterprise with an expectation of profits from the efforts of others.

The Howey test is why unusual arrangements, such as interests in citrus groves, pay-telephone schemes and many crypto-token sales, have been treated as securities even though they do not look like shares or bonds. For notes, US courts apply a separate "family resemblance" test from Reves v. Ernst & Young (1990). Outside the US the approach is more list-based: EU law defines transferable securities as classes of securities negotiable on the capital market, such as shares, bonds and instruments giving the right to acquire them.

• Equity securities. Common stock and preferred stock give part-ownership of a company, usually with voting rights and a claim on dividends but no promise of repayment.
• Debt securities. Bonds, notes, commercial paper and Treasury securities are loans to the issuer that pay interest and return principal at maturity.
• Hybrid securities. Instruments such as the convertible bond start as debt but can turn into shares.
• Pooled and derived securities. Units of a mutual fund or an exchange-traded fund, and asset-backed bonds created through securitization, give claims on a pool of other assets. Some derivatives, such as listed stock options, are securities; many others, such as futures, are regulated separately as commodity interests in the US.

Some securities cannot be traded at all once bought, such as US savings bonds; these are described as a nonmarketable security.

A security is first sold in the primary market, for example through an initial public offering (IPO) or a bond auction, and then changes hands in the secondary market on a financial exchange such as the Nasdaq or over the counter. In the US every public offer must be registered with the SEC unless an exemption applies, such as Regulation D for private placements, Regulation A for smaller offerings or Regulation S for offers made outside the US.

Buyers and sellers usually act through a broker. Almost all securities are now held in book-entry form at central securities depositories rather than as paper certificates, and each issue carries an identifier such as an ISIN or, in North America, a CUSIP. Since 28 May 2024 most US securities trades settle one business day after the trade (T+1); the EU and UK plan to move to T+1 in October 2027.

Securities law rests on disclosure rather than merit review: the regulator does not judge whether an investment is good, only whether investors have been told the material facts. Exchanges, brokers and investment advisers are licensed and supervised, and insider trading and market manipulation are criminal offences in most jurisdictions.

The main live debate is how far securities law reaches into digital assets. Regulators have applied the Howey test to token sales, and some issuers now offer shares and bonds as tokens through security token offerings, which remain securities whatever technology records them. Securities sit inside the wider capital market, alongside loans and deposits that are generally not securities.

• 15 U.S. Code § 77b — Definitions (Securities Act of 1933)