Many people are into investing nowadays mainly because they want to double their money. Aside from that, they also want to keep funds which they plan to use in the future like for education, home purchase or business. This is why people invest in securities. For an investment product to be called a security, it must have the following characteristics:
- It must be established with an investment of money.
- It must be in an environment with one objective.
- The expectation of profit should be present.
- Earnings must come from the efforts of another person other than the investor.
There two main types of security which are equity securities and debt securities. The concept of equity security is that you get to invest your money to different companies and corporations and become a part owner of that firm. The main objective is to generate profit from funds invested. The expected profit that you will get is called a dividend. If the management of the firm does a good job in operating the business, then there is a big chance that you will get that dividend. On the other hand, debt equity is investing your money by lending funds to the company or corporation. Generation of profit is still the main objective. Interest is the profit that you will expect. It still depends on the management of the firm if the business will do well or not.
The main difference between the two is the relationship of the investor with the firm. In equity security, the investor is a part owner of the firm while in debt security, the investor is a creditor and he is not an owner of the firm. But that does not mean that equity is better than debt because when it comes to payment prioritization, creditors are paid first since it is the responsibility of owners to pay the liabilities of the firm.
Both types of security poses risks of their own. For equity security holders, there is capital risk which means the risk of an investor losing all of the money he invested in the business because of poor management of the officers of the firm or bankruptcy. There is also credit risk for debt security holders which means the risk of a creditor losing all of the money he lent the firm because of management failure. Every investment, there is an associated risk, but this does not stop people from investing because there is a bigger chance of profit, especially when investing in establish companies and corporation.