Securities are a financial instrument used by companies to raise capital.
In the corporate world, there are 3 major types of securities that can be categorically defined. They are differentiated based on their function and mode of operation.
– Equity Securities
– Debt securities
– Derivative securities
With Equity securities, the investors attain ownership in the companies. The most common type of these instruments is the stocks of a company.
With debt securities, the company can borrow from the public to raise its capital. Bond is the most common instrument used as debt security.
Derivative security depends on another underlying instrument and derives its value based on the other instrument. A contract is one of the examples of derivative security.
Another security that does not fit into any of these 3 categories. This is called Hybrid security. A hybrid security is a combination of more than one type of financial instruments. A stock and a bond together is an example of a hybrid security.
Hybrid Securities are often referred to as ‘hybrids’. They can be bought or sold either in the exchange or through a brokerage. A hybrid security is relatively a new concept yet is very popular due to its advantages.
– Hybrid securities provide a high yield since the rate of return is higher than most senior debts.
– They are less volatile because the distribution of market returns is pre-determined and much regular.
– They have a diverse nature. As they are not bound to any specific category of securities, the overall risk involved is diversified, and thus guarantees attractive returns.
– The only disadvantage of hybrid securities is its complexity. It is more complicated than investing in equity or bond security.
There are many different types of hybrid securities. The following are the most widely used.
Each type of hybrid security has a unique risk involved and at the same time also has reward characteristics. Many other new types of hybrid securities are being introduced all the time in an attempt to meet the needs of sophisticated investors.
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