Understanding Different Financial Securities

If you have decided to start investing for financial gains, you will come across the term financial security. While this term is mainly used for denoting shares, stocks and bonds, they can also include some other financial instruments. Make sure you comply with the annual self assessment tax return rules to avoid any tax problem. You will keep all your investments legal if you comply with tax regulations.

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Financial Securities

They are negotiable and fungible investment instruments with some financial value. The popular examples include stocks, bonds and ETF (exchange traded fund). For any investment instrument to fall under the category of financial security, it must have the option to sell, buy or trade openly. These features allow a financial asset to be traded in a market. Companies can sell securities to generate new capital.

Investors can trade in these securities.

A security is a legally binding contract between the issuer and the investor. It is an asset with a financial value. Both companies and governments create these instruments to attract investments. The securities are different from tangible assets, such as car, home, jewellery and property. The main differentiator is the trading feature. Financial securities can be traded, allowing the buyer of the security to trade it for something that has a monetary value.

Types of Securities

Financial securities are divided into two categories: debt and equity. Debt securities include company and sovereign bonds. Shares are considered equity securities. You will also come across hybrid securities whereas characteristics of both debt and equity securities can be found. Some of the examples include convertible bonds, equity warrants and preferential shares.

Equity securities provide ownership rights while debt securities promise to pay back the invested money with interest. Equity securities are issued to the investors. When you buy an equity security, you get part ownership of the company.

Debt securities are issued to the investors on the promise of repaying the principal amount with interest, similar to how loans work. Governments often issue bonds to borrow money for their mega projects. Investors in these bonds receive interest during the bond's duration. A debt security is something where you lend money like a lender.

The Purpose of a Financial Security

Companies and governments issue securities to raise capital money. They use this money to grow, continue their existing operations, and to fulfil other financial obligations. The one issuing the security is called issuer while the one investing in it is called the investor. Stock markets are the places where most people deal in securities. The company and government bonds are issued at these stock exchanges. Later, investors can trade their stocks and bonds through these exchanges. The exchange trading platforms make it easier to connect with the companies issuing securities and the investors looking for the securities to invest.

Importance of Tax Compliance

Governments need tax money to run their operations, take care of existing public infrastructure, and build new infrastructure for public use. They can do all these things and more when businesses and individuals living, working and operating in their jurisdiction pay taxes. Tax compliance helps you avoid legal problems. The penalty for not complying with these laws can range from a financial penalty to jail terms and closure of the business. Comply with tax laws to avoid such problems.