Types of Securities

Security refers to a financial instrument or a financial asset that can be traded in the open market. Securities are classified into four main categories – Equity, Debt, Derivatives and Hybrid.

Debt securities:

Debt securities or fixed income securities represent money that is borrowed and is required to be repaid following the underlying terms that are agreed upon including interest rate, maturity date etc.

Debt securities are just debt instruments such as government bonds, municipal bonds or certificate of deposits that can be traded and exchanged between parties.

Most of the debt securities including the most common ones like bonds and certificate of deposits mandate the holder to make a series of regular payments which included the interest and principal component, to satisfy the debt obligation.

Equity securities:

Equity securities are the type of securities that involve ownership in a firm. These securities represent the ownership interest held by shareholders. In an essence, it is an investment in an organization’s equity component to become the shareholder of that organization.

Owning an equity entitles the holder to have a claim over the issuing company’s income and assets. For example, if an investor owns 10% shares of a particular Company, then the part of the ownership of the investor in the controlling company is 10%.

The most common type of security is the common stock and the main characteristic that defines and differentiates it from the other types of securities is ownership. Other major assets like exchange-traded funds (ETFs) and mutual funds can also be considered as equity securities as long as their holdings comprise of the pooled equity securities.

The difference between debt holders and equity holders is that the equity holders are not entitled to regular fixed payments but have the voting rights.


Derivative securities are the type of financial instruments that derive its value from the value of the underlying asset. The underlying asset can be of various types such as bonds, stocks, currencies, interest rates, market indices and goods. The primary purpose of using derivatives is to mitigate the risk. It can be achieved by insuring against price movements and taking positions favorable to speculations and getting access to difficult assets or markets.

There are four main types of derivatives – Futures, Forwards, Swaps and Options.


Futures, also referred to as future contracts are agreements between two parties for the purchase and delivery at an agreed upon price and date. These contracts are traded on exchanges.


Forwards are like future contracts except in that forward are not traded on exchanges. Forward contracts are also customizable unlike future contracts.


Swaps involve an exchange of series of cash flows. The most common types of Swaps is interest rate swaps.


Option contracts are similar to future contracts except in that the buyer of the option contract has the right but not the obligation to perform the action.

Hybrid securities:

Hybrid securities are a combination of both equity and debt-based securities. These securities essentially contain a certain proportion of debt and the balance in equity. The combination of both debt and equity is used to mitigate risk and and maximize the risk adjusted return.

Similar to bonds, hybrid securities promise to pay a high rate of return at a fixed rate until a certain time in future. However, unlike a bond, the number and timing of interest payments are not guaranteed.

The most common examples of hybrid securities are preferred shares and convertible bonds.

Types of security markets

*Primary markets: Primary market is where the securities are created, initially prior to the enlisting. The primary market deals with securities that are issued for the purpose of inviting subscription to the shares of a listed company.

On the allocation of shares in primary market, the investors hold the voting rights and other ownership benefits.

The money received from the investors in the case of primary market goes directly to the firm and is utilized by the firm as capital.

Some of the major categories under primary markets include – IPOs, Private placements etc. Initial public offering(IPO) is the process by which an unlisted company invites public to subscribe a specified number of shares through a public offer.

*Secondary markets: A secondary market is where investors trade securities they already own. It differs from primary market in the sense that previously issued securities are bought and sold by the investors in the market.

The major categories under secondary market include – Exchanges, dealers, auction and Over the counter(OTC) markets.


  1. www.statisa.com

  2. Wikipedia

  3. Investopedia

  4. RBI

  5. SEBI



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