Legal Definitions - Security

The term Security has two primary meanings in a legal and financial context:

1. Property or Asset Pledged as Guarantee:

In this sense, security refers to something valuable—an asset or property—that an individual or entity offers to guarantee that they will fulfill an obligation, such as repaying a loan or performing a contract. If the obligation is not met, the party who received the security has the right to claim or sell that asset to recover their losses.

• Example 1: Car Loan
  When someone takes out a loan to buy a car, the car itself often serves as security for the loan. If the borrower fails to make their monthly payments, the lender has the legal right to repossess the car to recover the outstanding debt.
• Example 2: Commercial Lease Deposit
  A small business renting office space might provide a cash deposit to the landlord. This deposit acts as security, guaranteeing that the business will pay rent on time and maintain the property. If the business defaults on rent or causes damage, the landlord can use the deposit to cover these costs.
• Example 3: Business Line of Credit
  A manufacturing company might secure a line of credit from a bank by pledging its inventory and accounts receivable (money owed to it by customers) as security. This means if the company cannot repay the credit, the bank can claim these assets.

2. Tradable Financial Instrument:

In this context, security refers to a tradable financial asset that represents either an ownership stake in a company (like a stock) or a debt owed by a company or government (like a bond). These instruments can be bought and sold in financial markets and represent a claim on the issuer's assets or earnings.

• Example 1: Company Stock
  When an individual purchases shares of a publicly traded technology company, they are buying a security. Each share represents a small ownership stake in the company, giving the holder potential rights like voting on company matters or receiving dividends.
• Example 2: Municipal Bond
  A city government might issue a municipal bond to raise money for a new public park project. An investor who buys this bond is purchasing a security, essentially lending money to the city in exchange for regular interest payments and the promise that the principal amount will be repaid at a future date.
• Example 3: Exchange-Traded Fund (ETF)
  An investor might buy units of an ETF that tracks the performance of a specific industry sector, like renewable energy. These ETF units are securities, representing a diversified portfolio of stocks within that sector, and can be traded on stock exchanges throughout the day.