The term securities is used to describe a wide range of financial instruments. These include stocks and bonds, profit participation certificates, investment fund shares, notes, warrants and structured products all fall under the securities category.

In every case, these financial instruments are contracts which endow their holder with specific rights. Shares in corporate stocks, for example, are title deeds to a portion of ownership of a corporation. Only the person who owns a security benefits from the special rights which the security provides.

Article 965 of the Swiss Code of Obligations defines a security as any certificate which provides a right that cannot be exercised or transferred in the absence of the certificate.

A clear difference is made between securities and other types of contracts. The most important factor here is the securitization process, which is not used in invoices, certificates of debt, purchase agreements and other contracts.

Securities may be issued as physical paper certificates which can be physically held by the holder and transferred directly from one owner to another. While aper certificates have the unique advantages of being holdable and transferrable without the services provided by custodian banks and securities brokers, they are also prone to theft or damage.

In recent decades, trading in securities like stocks and other financial instruments has largely been performed electronically. While physical certificates are still issued by some companies and are even legally required in certain jurisdictions, the vast majority of securities are now issued as electronic records only. When an investor buys an electronic security, they receive a confirmation of their purchase, but they do not receive a physical certificate proving ownership. In the case of corporate shares, stock ownership is normally recorded in the corporation's share register.

Experts dissect securities which can be traded on the stock market into three key components.

1. The scrip is the primary component of a security. This is the contract which states the rights granted to the owner of the security.

2. The coupon sheet contains multiple dividend coupons which, in combination with the scrip, entitle the holder of the security to dividends or interest.

3. The renewal coupon guarantees that a new coupon sheet can be added after existing coupons have been used. This allows for open-ended investments with ongoing returns.

More on this topic:
Securities trading tips
Securities trading fees comparison

Expert Benjamin Manz
Benjamin Manz is CEO of and an independent expert on banking and finance.
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