What Are Investment Securities?

When you’re starting to invest, you’ll take cash and buy different types of investments, or securities. There are many types of securities you can invest in, and the ones you choose depend on what type of investor you are. Once you take your personal circumstances and risk tolerance into account, you can select the securities that best fit your portfolio.

If you want to learn more about securities you can invest in, try speaking with a financial advisor.

What to Know About Investment Securities

Investment securities are tradable financial assets that investors typically purchase with the intent of holding until they grow in value. It’s also possible to hold securities for income. However, the value of securities may rise or fall, and there are no guarantees.

There are multiple different types of securities. Most fall into one of the following three categories:

• Equity securities: Equities are typically shares in a corporation, commonly known as stocks. That means you’ll literally own a portion of that company.
• Debt securities: These are loans, or bonds, issued to the market by companies and governments. Bonds are often less volatile than stocks, but their safety depends on the issuer’s creditworthiness, interest rates and other risks.
• Derivatives: A derivative can be based on stocks or bonds, but also include futures contracts. Those contracts, including commodities futures, allow investors to bet for or against the price of a particular asset. However, derivatives can involve substantial risk, particularly when they involve leverage, and as such may be a poor choice for a new investor.

Securities are traded through stock markets and secondary markets, though bonds are usually restricted to the latter. The U.S. Securities and Exchange Commission oversees the sale and trade of securities with the help of Self-Regulatory Organizations (SROs). Those groups include the Financial Industry Regulatory Authority (FINRA), which was formed in 2007 through the consolidation of NASD and the member regulation functions of the New York Stock Exchange.

Common Types of Securities

Here are the four most well-known and commonly traded securities available on the market today.

1. Stocks

Stocks give you, the shareholder, a portion (or share) of ownership in a company. When a stock price rises, your investment’s market value also rises. The more shares you own, the more money you stand to gain (or lose) for a given change in the share price. Similarly, if a stock price falls, you’ll lose more money.

Stocks are risky compared to other securities. If you’re younger, investing in stocks for the long-term may be appropriate depending on your financial goals and risk tolerance. But if you’re older and closer to retirement, you might consider something less risky, like bonds.

You can buy individual stocks through a brokerage or direct stock plans. They are also purchasable through stock funds, a type of mutual fund that focuses on stocks.

2. Bonds

Bonds are debt securities. When you buy a bond, you’re lending money to a company, government entity or municipality. The issuer generally agrees to repay the principal according to the bond’s terms and may make periodic interest payments. Once the bond matures, the remaining principal is generally due.

There are many different types of bonds, including:

• Corporate bonds
• Investment-grade bonds
• Municipal bonds
• U.S. Treasury bonds

Bonds can bring in steady income. Many pay interest twice a year, but payment schedules vary. They still carry risk, though. If the bond issuer doesn’t stay up-to-date on interest or principal payments, they could default on their bonds. Selling bonds before they reach maturity could mean receiving less than the face value.

Taxes are also worth noting. Most corporate bond interest is subject to federal income tax, while interest on qualifying municipal bonds is generally exempt from federal income tax. Interest on U.S. Treasury securities is subject to federal income tax but exempt from state and local income taxes.

3. Mutual Funds

Mutual funds consist of many different types of securities, including stocks and bonds. A mutual fund pools the money of many different investors, and the combined funds make up shares in a portfolio. Each share is part of your ownership in the fund.

There are a few different types of mutual funds, including:

• Money market funds
• Bond funds
• Stock funds
• Target-date funds

Mutual funds offer access to diversification when they hold a broad range of investments. Since your money can go towards many different types of securities at once, a loss in one holding may have less impact on your overall investment. However, a fund concentrated in one sector or asset class can still experience significant losses.

4. Exchange-Traded Funds (ETFs)

ETFs are like mutual funds in that investors pool their money into a fund made up of many different securities, like stocks, bonds and other assets. One major way ETFs and mutual funds differ is how you can buy and sell them. Unlike mutual funds, ETFs are traded through the stock market like stocks, and you can buy and sell them throughout the day.

Often, ETFs track market indexes, a passive management approach that can result in relatively low expenses. That said, others are actively managed and may charge higher fees.

How to Invest in Securities

Choosing to invest in securities is only part of the process. You also need a vehicle to make those investments. This is typically entails opening your own investment account, investing in a retirement account at work or hiring a financial advisor who can open and manage your investment accounts on your behalf.

Here are the most popular ways to invest in securities:

Brokerage Accounts

Brokerage accounts, many of which are now available online, provide investors with a direct line to the investment market. That makes them the preferred choice of most investors, as all they need to do is sign up with a brokerage, deposit money in their account and begin investing.

Many different brokerages offer individual accounts, with costs and securities options varying between them. A few of the most popular options include Merrill Edge, Charles Schwab, E*TRADE and Vanguard.

Retirement Accounts

Retirement accounts, like individual retirement accounts (IRAs), and 401(k)s, offer some variation of mutual funds, stocks and variable annuities. Some offer brokerage accounts, so you can invest in stocks, bonds and other assets.

The type of retirement account you choose depends on your job. 401(k)s are work-sponsored retirement accounts where you can contribute a portion of your earnings to your account. Sometimes, your company will offer to match those contributions up to a certain percentage.

IRAs come in a few different forms, like traditional IRAs and Roth IRAs. Both are helpful options if you don’t have a work-sponsored 401(k) plan. They offer different tax incentives, and your income could determine which option is best for you.

Annuities

An annuity is a financial contract you have with an insurance company to pay you at a specified date. Sometimes, that payout is immediately; sometimes it’s in the future. You can buy an annuity either with one payment in full or through many payments, depending on the specifics of the agreement.

Annuities are popular among retirees because they allow them to receive a fixed income after they’ve stopped working and earning money. You can receive payments for a set amount of time, even up until you die. After that, your beneficiary may receive payment if the contract provides for a death benefit or continuing payments.

There are a handful of different types of annuities, including:

• Variable annuity
• Fixed annuity
• Indexed annuity

While it’s a good idea to secure some funding in retirement, annuities can have drawbacks. You could die before collecting all of the money you’re owed, and some annuities don’t pay beneficiaries after your death.

Education Plans

Education investments can include 529 savings plans or custodial accounts. (Note that 529 prepaid tuition accounts don’t have investment options.)

For 529 savings plans, you can invest in either mutual funds or ETFs. Earnings grow tax-deferred, and withdrawals are tax-free as long as they are used for qualifying education expenses, whether it’s for K-12 school or college-related costs. The federal tax rules limit which expenses qualify and how much account holders can be withdraw tax-free for certain uses. It’s possible to use up to $20,000 per beneficiary annually for eligible K-12 expenses, subject to the applicable rules. ¹

Another option, Uniform Gift to Minors Act (UGMA) custodial accounts, allow you to invest in many different types of securities, including stocks, bonds, mutual funds, annuities and insurance policies. Parents can open up an account on behalf of their child and transfer ownership once the child reaches 18 or 21, depending on the laws of the state the plan is in.

The Uniform Transfers to Minors Act (UTMA) account is another type of custodial account. It allows investments into other types of assets, including real estate and intellectual property.

Bottom Line

You have a few different ways to invest in securities. Which option makes sense depends on what best fits your finances and lifestyle. Before you take the plunge into investing in securities, review the different options and account types first. While some securities might not be a good fit, diversifying your portfolio is a great way to spread investment risk, although it cannot eliminate the possibility of losses.

Tips for Investing

• Navigating the investment landscape might not be as easy as many think, so it may help to talk with an expert who can help you weave through the process. Financial advisors often have expertise in investing, and finding the right one doesn’t have to be difficult. SmartAsset’s free tool matches you with financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
• There are ways to invest outside of securities. If you’re looking to minimize your risk as much as possible, you might explore high-interest savings accounts or CDs. Your earnings might be less compared to investments, but you also get to keep all your money.

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