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What Is a Financial Security?

A financial security, or simply security, is an instrument that represents financial value. It is negotiable and fungible. There are two broad categories of financial securities - debt securities and equity securities. The main purpose of a financial security is to make a profit on top of its face value.

Debt securities include banknotes, bonds, and debentures. Banknotes are perhaps the most commonly used kind of debt security. Essentially, banknotes are paper money. Countries or regional alliances issue their own banknotes, which are negotiable instruments. Bonds are a type of debt capital instrument that is sold to an investor for a specific price for a specified period of time. At the end of this period, the investor will receive payment for the full price of the bond, together with interest. This interest is determined at the beginning of the transaction. Debentures are documents which acknowledges or creates a debt. In some cases, the term is used interchangeably with bonds.

Equity securities mainly refer to stocks. There are many different kinds of stocks - common stocks, preferred stocks, and so on. The idea behind stocks is that they represent a financial value and that they can be used to generate more income by being sold. Stocks can also be used as collateral when necessary.

Various entities may issue financial securities. Generally, governments issue bonds and banknotes. The common practice is for governments to issue bonds to fund an upcoming project. Corporations also issue financial securities in the form of stocks. There are exceptions, but the rule of thumb is that bonds have lower interest rates as compared to stocks.

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