Financial Security:
The term “security” refers to a fungible, negotiable financial instrument that holds some type of
monetary value. A security can represent ownership in a corporation in the form of stock, a creditor
relationship with a governmental body or a corporation represented by owning that entity’s bond; or
rights to ownership as represented by an option.
Securities are fungible and tradable financial instruments used to raise capital in public and private
markets.
There are primarily three types of securities: equity—which provides ownership rights to holders;
debt—essentially loans repaid with periodic payments; and hybrids—which combine aspects of debt and
equity.
Public sales of securities are regulated by the SEC.
Self-regulatory organizations such as NASD, NFA, and FINRA also play an important role in regulating
derivative securities.
The Securities Act of 1933 is the first federal legislation to regulate the U.S. stock market, an authority
that was previously regulated at the state level. Under the law, anyone who wishes to sell investment
contracts to the public must publish certain information regarding the proposed offering, the company
making the offering, and the principal figures of that company.
These requirements are intended to protect the investing public from deceptive or misleading marketing
practices. The company and its leading figures are strictly liable for any inaccuracy in its financial
statements, whether intentional or not. Later legislation created the Securities and Exchange Commission
(SEC), which is responsible for regulations and enforcement.
Although the term “securities” is commonly associated with stocks, bonds, and similar instruments, the
U.S. Supreme Court gives the term a much broader interpretation. In the case of Howey vs. SEC (1946),
the court found that the plaintiff’s sale of land and agricultural services constituted an “investment
contract”—even though there was no trace of a stock or bond.
This case established the four-prong Howey Test, which states that an investment can be regulated as a
security if:
Securities can be broadly categorized into two distinct types: equities and debts. However, some hybrid
securities combine elements of both equities and debts