Legal Definitions - Securities

Securities are financial instruments that represent either an ownership stake in a company or a debt owed by a company or government. They are not valuable in themselves but derive their worth from the underlying assets, earnings, or future prospects of the entity that issued them.

Essentially, when you own a security, you own a piece of a company's future profits, a share of its assets, or a promise of repayment with interest. These instruments are bought and sold by investors to raise capital for businesses or governments, or to grow their own wealth.

Here are some examples of how securities function:

• Company Stock: Imagine a major technology company, "Quantum Innovations Inc.," decides to raise money to expand its research and development department. It offers shares of its common stock to the public on a stock exchange.

  When an investor buys a share of Quantum Innovations' common stock, they are purchasing a security. This share represents a small ownership stake in the company, giving them a claim on a portion of its future profits and assets, and often a right to vote on certain company matters. The value of this security fluctuates based on Quantum Innovations' performance, market conditions, and investor confidence.

• Government Bond: The city of "Harmonyville" needs to finance the construction of a new public library and upgrade its water treatment facility. To do this, the city issues municipal bonds to investors.

  These municipal bonds are securities. When an investor buys a Harmonyville bond, they are essentially lending money to the city. In return, the city promises to pay the investor regular interest payments over a set period and to return the original amount loaned (the principal) when the bond matures. This represents a debt obligation, where the security (the bond) gives the owner a claim on the city's future tax revenues or other assets to ensure repayment.

• Investment Contract in a Startup: A group of angel investors provides funding to a promising new biotechnology startup, "BioGen Innovations," in exchange for an "investment contract." This contract specifies that the investors will receive a percentage of the company's profits once it becomes successful, or a share of the company if it's acquired by a larger entity.

  This investment contract is a security because it represents a financial claim on the future earnings and assets of BioGen Innovations. Even though it's not a traditional stock or bond, it entitles the investors to a share of the venture's success, making its value dependent on the startup's performance and future prospects, fitting the definition of a security.