Types of Security (2024)

Debt, equities, derivatives, hybrid securities

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What are the Types of Security?

There are four main types of security: debt securities, equity securities, derivative securities, and hybrid securities, which are a combination of debt and equity.

Types of Security (1)

Let’s first define security. Security relates to a financial instrument or financial asset that can be traded in the open market, e.g., a stock, bond, options contract, or shares of a mutual fund, etc. All the examples mentioned belong to a particular class or type of security.


  • Security is a financial instrument that can be traded between parties in the open market.
  • The four types of security are debt, equity, derivative, and hybrid securities.
  • Holders of equity securities (e.g., shares) can benefit from capital gains by selling stocks.

Debt Securities

Debt securities, or fixed-income securities, represent money that is borrowed and must be repaid with terms outlining the amount of the borrowed funds, interest rate, and maturity date. In other words, debt securities are debt instruments, such as bonds (e.g., a government or municipal bond) or a certificate of deposit (CD) that can be traded between parties.

Debt securities, such as bonds and certificates of deposit, as a rule, require the holder to make the regular interest payments, as well as repayment of the principal amount alongside any other stipulated contractual rights. Such securities are usually issued for a fixed term, and, in the end, the issuer redeems them.

A debt security’s interest rate on a debt security is determined based on a borrower’s credit history, track record, and solvency – the ability to repay the loan in the future. The higher the risk of the borrower’s default on the loan, the higher the interest rate a lender would require to compensate for the amount of risk taken.

It is important to mention that the dollar value of the daily trading volume of debt securities is significantly larger than stocks. The reason is that debt securities are largely held by institutional investors, alongside governments and not-for-profit organizations.

Equity Securities

Equity securities represent ownership interest held by shareholders in a company. In other words, it is an investment in an organization’s equity stock to become a shareholder of the organization.

The difference between holders of equity securities and holders of debt securities is that the former is not entitled to a regular payment, but they can profit from capital gains by selling the stocks. Another difference is that equity securities provide ownership rights to the holder so that he becomes one of the owners of the company, owning a stake proportionate to the number of acquired shares.

In the event a business faces bankruptcy, the equity holders can only share the residual interest that remains after all obligations have been paid out to debt security holders. Companies regularly distribute dividends to shareholders sharing the earned profits coming from the core business operations, whereas it is not the case for the debtholders.

Derivative Securities

Derivative securities are financial instruments whose value depends on basic variables. The variables can be assets, such as stocks, bonds, currencies, interest rates, market indices, and goods. The main purpose of using derivatives is to consider and minimize risk. It is achieved by insuring against price movements, creating favorable conditions for speculations and getting access to hard-to-reach assets or markets.

Formerly, derivatives were used to ensure balanced exchange rates for goods traded internationally. International traders needed an accounting system to lock their different national currencies at a specific exchange rate.

There are four main types of derivative securities:

1. Futures

Futures, also called futures contracts, are an agreement between two parties for the purchase and delivery of an asset at an agreed-upon price at a future date. Futures are traded on an exchange, with the contracts already standardized. In a futures transaction, the parties involved must buy or sell the underlying asset.

2. Forwards

Forwards, or forward contracts, are similar to futures, but do not trade on an exchange, only retailing. When creating a forward contract, the buyer and seller must determine the terms, size, and settlement process for the derivative.

Another difference from futures is the risk for both sellers and buyers. The risks arise when one party becomes bankrupt, and the other party may not able to protect its rights and, as a result, loses the value of its position.

3. Options

Options, or options contracts, are similar to a futures contract, as it involves the purchase or sale of an asset between two parties at a predetermined date in the future for a specific price. The key difference between the two types of contracts is that, with an option, the buyer is not required to complete the action of buying or selling.

4. Swaps

Swaps involve the exchange of one kind of cash flow with another. For example, an interest rate swap enables a trader to switch to a variable interest rate loan from a fixed interest rate loan, or vice versa.

Types of Security (2)

Hybrid Securities

Hybrid security, as the name suggests, is a type of security that combines characteristics of both debt and equity securities. Many banks and organizations turn to hybrid securities to borrow money from investors.

Similar to bonds, they typically promise to pay a higher interest at a fixed or floating rate until a certain time in the future. Unlike a bond, the number and timing of interest payments are not guaranteed. They can even be converted into shares, or an investment can be terminated at any time.

Examples of hybrid securities are preferred stocksthat enable the holder to receive dividends prior to the holders of common stock, convertible bonds that can be converted into a known amount of equity stocks during the life of the bond or at maturity date, depending on the terms of the contract, etc.

Hybrid securities are complex products. Even experienced investors may struggle to understand and evaluate the risks involved in trading them. Institutional investors sometimes fail at understanding the terms of the deal they enter into while buying hybrid security.

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Types of Security (2024)


What are the 4 types of securities? ›

There are four main types of security: debt securities, equity securities, derivative securities, and hybrid securities, which are a combination of debt and equity.

What are two types of security? ›

Equity securities – which includes stocks. Debt securities – which includes bonds and banknotes.

How many forms of security are there? ›

In conclusion, security takes many forms to provide comprehensive protection in an increasingly digital world. Physical security, network security, data security, cybersecurity, and social engineering protection each play a vital role in safeguarding personal, organizational, and digital assets.

What are the examples of securities? ›

Key Takeaways. Stocks, bonds, preferred shares, and ETFs are among the most common examples of marketable securities. Money market instruments, futures, options, and hedge fund investments can also be marketable securities. The overriding characteristic of marketable securities is their liquidity.

What are the five types of securities? ›

Types of securities
  • Equity securities. Equity securities, commonly known as stocks or shares, represent ownership in a company. ...
  • Debt securities. ...
  • Hybrid securities. ...
  • Derivative securities. ...
  • Asset-backed securities.

What are the three main types of securities? ›

Securities are fungible and tradable financial instruments used to raise capital in public and private markets. There are primarily three types of securities: equity—which provides ownership rights to holders; debt—essentially loans repaid with periodic payments; and hybrids—which combine aspects of debt and equity.

What are the 7 types of security? ›

These are economic security, food security, health security environmental security, personal security, community security, and political security. Some of the criteria associated with economic security include insured basic income and employment, and access to such social safety net.

What is the most common security type? ›

Types of Wi-Fi security protocols. The most common wireless security protocol types today are WEP, WPA, and WPA2.

What is the most effective types of security? ›

Top 10 Most Effective Security Measures for Small Businesses
  1. Access Control Systems. ...
  2. CCTV Surveillance. ...
  3. Intruder Alarms. ...
  4. Security Guards. ...
  5. Automated Gates & Barriers. ...
  6. Suitable Lighting. ...
  7. Security System Monitoring. ...
  8. Safe Storage Solutions.
Sep 4, 2023

What is the highest class of security? ›

Top secret clearance is the highest security clearance level anyone can get. A candidate's responsibilities determine the level of clearance granted. State and local law enforcement officers, for example, usually need confidential or secret clearance.

What is a security guard called? ›

A security guard (also known as a security inspector, security officer, factory guard, or protective agent) is a person employed by a government or private party to protect the employing party's assets (property, people, equipment, money, etc.)

What is security and types of security? ›

The four types of securities are debt, equity, hybrid, and derivative.

What are the two most common types of securities? ›

Securities recap
  • Equity securities are financial assets that represent shares of a corporation.
  • Fixed income securities are debt instruments that provide returns in the form of periodic, or fixed, interest payments to the investor.

What is the legal definition of a security? ›

Introduction. A security is "[a]n instrument that evidences the holder's ownership rights in a firm (e.g., a stock), the holder's creditor relationship with a firm or government (e.g., a bond), or the holder's other rights (e.g., an option)." Black's Law Dictionary, 10th ed.

What are the three major parts of security analysis? ›

The three primary types of security analysis are fundamental, technical, and quantitative, each employing distinct methodologies to assess securities' worth and market trends.

What are the most common securities? ›

If you've done any investing at all, you're probably familiar with the more common terms describing traditional securities: stocks, bonds, exchange-traded funds (ETFs), mutual funds, and so on.

Are securities the same as stocks? ›

The term "security" is defined broadly to include a wide array of investments, such as stocks, bonds, notes, debentures, limited partnership interests, oil and gas interests, and investment contracts.

Is cash considered a security? ›

In the United States, a "security" is a tradable financial asset of any kind. Securities can be broadly categorized into: debt securities (e.g., banknotes, bonds, and debentures) equity securities (e.g., common stocks)

What are the four securities traded on stock exchange? ›

The instruments traded (media of exchange) in the capital market are:
  • Debt Instruments.
  • Equities (also called Common Stock)
  • Preference Shares.
  • Derivatives.

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