Securities may be classified according to many categories or classification systems:
* Currency of denomination
* Ownership rights
* Term to maturity
* Degree of liquidity
* Income payments
* Tax treatment
* Credit rating
* Industrial sector or "industry". ("Sector" often refers to a higher level or broader category, such as Consumer Discretionary, whereas "industry" often refers to a lower level classification, such as Consumer Appliances. See Industry for a discussion of some classification systems.)
* Region or country (such as country of incorporation, country of principal sales/market of its products or services, or country in which the principal securities exchange where it trades is located)
* Market capitalization
* State (typically for municipal or "tax-free" bonds in the U.S.)
New capital
Commercial enterprises have traditionally used securities as a means of raising new capital. Securities may be an attractive option relative to bank loans depending on their pricing and market demand for particular characteristics. Another disadvantage of bank loans as a source of financing is that the bank may seek a measure of protection against default by the borrower via extensive financial covenants. Through securities, capital is provided by investors who purchase the securities upon their initial issuance. In a similar way, the governments may raise capital through the issuance of securities (see government debt).
Repackaging
In recent decades, securities have been issued to repackage existing assets. In a traditional securitization, a financial institution may wish to remove assets from its balance sheet to achieve regulatory capital efficiencies or to accelerate its receipt of cash flow from the original assets. Alternatively, an intermediary may wish to make a profit by acquiring financial assets and repackaging them in a way more attractive to investors. In other words, a basket of assets is typically contributed or placed into a separate legal entity such as a trust or SPV, which subsequently issues shares of equity interest to investors. This allows the sponsor entity to more easily raise capital for these assets as opposed to finding buyers to purchase directly such assets.
By type of holder
Investors in securities may be retail, i.e. members of the public investing other than by way of business. The greatest part in terms of volume of investment is wholesale, i.e. by financial institutions acting on their own account, or on behalf of clients. Important institutional investors include investment banks, insurance companies, pension funds and other managed funds.
Investment
The traditional economic function of the purchase of securities is investment, with the view to receiving income and/or achieving capital gain. Debt securities generally offer a higher rate of interest than bank deposits, and equities may offer the prospect of capital growth. Equity investment may also offer control of the business of the issuer. Debt holdings may also offer some measure of control to the investor if the company is a fledgling start-up or an old giant undergoing 'restructuring'. In these cases, if interest payments are missed, the creditors may take control of the company and liquidate it to recover some of their investment.
Collateral
The last decade has seen an enormous growth in the use of securities as collateral. Purchasing securities with borrowed money secured by other securities or cash itself is called "buying on margin". Where A is owed a debt or other obligation by B, A may require B to deliver property rights in securities to A, either at inception (transfer of title) or only in default (non-transfer-of-title institutional). For institutional loans property rights are not transferred but nevertheless enable A to satisfy its claims in the event that B fails to make good on its obligations to A or otherwise becomes insolvent. Collateral arrangements are divided into two broad categories, namely security interests and outright collateral transfers. Commonly, commercial banks, investment banks, government agencies and other institutional investors such as mutual funds are significant collateral takers as well as providers. In addition, private parties may utilize stocks or other securities as collateral for portfolio loans in securities lending scenarios.
On the consumer level, loans against securities have grown into three distinct groups over the last decade: 1) Standard Institutional Loans, generally offering low loan-to-value with very strict call and coverage regimens, akin to standard margin loans; 2) Transfer-of-Title (ToT) Loans, typically provided by private parties where borrower ownership is completely extinguished save for the rights provided in the loan contract; and 3) Non-Transfer-of-Title Credit Line facilities where shares are not sold and they serve as assets in a standard lien-type line of cash credit. Of the three, transfer-of-title loans have fallen into the very high-risk category as the number of providers have dwindled as regulators have launched an industry-wide crackdown on transfer-of-title structures where the private lender may sell or sell short the securities to fund the loan. See sell short. Institutionally managed consumer securities-based loans, on the other hand, draw loan funds from the financial resources of the lending institution, not from the sale of the securities.
Source : http://en.wikipedia.org
