Debt and Equity Securities in Capital Markets
A security is a fungible, negotiable instrument representing financial value. Securities are broadly categorized into debt securities (e.g., banknotes, bonds, and debentures) and equity securities (e.g., common stocks); and derivative contracts (e.g., forwards, futures, options, and swaps).
Governments and corporations that need to borrow money are matched with investors who have funds to lend via the U.S. bond market. Companies sell bonds in a debt offering to raise money that they invest in growth and development or fund operations. They may prefer to sell bonds because share prices are low, and issuing more stock can lessen the value of shares investors already own.
Similar to an initial public offering (IPO), a securities firm helps set the terms and underwrites, with its own money and sometimes that of its investors, the sale by buying up the issue. The securities firm then distributes the bond to other firms for sale to the public.
Bonds: A Tool for Funding Public Works
Bonds can offer investors a specific rate of interest for a fixed period. Because governments are not profit-making enterprises and therefore cannot issue stock, they use bonds to raise money to finance public infrastructure projects on roads, schools, hospitals, etc.
In addition, bond proceeds also keep state and local governments’ daily operations running when other revenues aren’t sufficient to cover costs. These municipal bonds are especially attractive to investors for several reasons:
- There is a wide range of maturities available, which offer flexibility to tailor a portfolio of municipal securities to fit specific investment needs and financial plans;
- The investment is relatively safe; and
- The interest is usually exempt from federal and state income taxes.
Continue reading about Industry Basics: Building a Global Framework in Foreign Securities Markets.
