Legal Definitions - investment security

An investment security is a financial asset that represents an ownership stake in a company, a creditor relationship with a governmental body or corporation, or a right to acquire an ownership stake or creditor relationship. These assets are typically bought and sold with the expectation of generating a return, either through capital appreciation (the asset increasing in value) or through income (such as dividends or interest payments).

Here are some examples to illustrate what an investment security is:

• Example 1: Shares in a Technology Startup

  Imagine an individual purchases shares of stock in a new technology company that has recently gone public. By buying these shares, the individual becomes a part-owner of the company, hoping that the company's innovations will lead to growth and an increase in the value of their shares over time. They might also receive dividends if the company decides to distribute a portion of its profits to shareholders.

  This illustrates an investment security because the shares represent an ownership interest in the company, are bought with the expectation of financial return, and can be traded on a stock exchange.

• Example 2: Government Bonds

  A retiree decides to invest a portion of their savings in U.S. Treasury bonds. These bonds are essentially loans made to the U.S. government, which promises to pay the bondholder regular interest payments over a set period and return the original principal amount at maturity. The retiree is looking for a stable income stream and a safe place to preserve their capital.

  This demonstrates an investment security because the bond represents a creditor relationship with the government, provides a fixed income stream, and is a transferable financial instrument.

• Example 3: Exchange-Traded Fund (ETF) Units

  A young professional wants to invest in a diversified portfolio of companies focused on renewable energy but doesn't want to research individual stocks. They purchase units of an Exchange-Traded Fund (ETF) that holds shares in many different solar panel manufacturers, wind turbine companies, and battery storage innovators. The value of their ETF units will fluctuate with the performance of the underlying renewable energy companies.

  This is an investment security because each unit of the ETF represents a fractional ownership interest in a basket of other securities, is traded on an exchange, and is acquired with the goal of capital appreciation or income from the underlying assets.