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There are two sources that I have found about securities and am not sure how they are consistent with each other.

The first one is from Wikipedia article about financial instruments:

Financial instruments can be categorized by form depending on whether they are cash instruments or derivative instruments:

  • Cash instruments are financial instruments whose value is determined directly by markets. They can be divided into securities, which are readily transferable, and other cash instruments such as loans and deposits, where both borrower and lender have to agree on a transfer.

  • Derivative instruments are financial instruments which derive their value from the value and characteristics of one or more underlying entities such as an asset, index, or interest rate. They can be divided into exchange-traded derivatives and over-the-counter (OTC) derivatives.

The second is from Wikipedia article about securities:

A security is generally a fungible, negotiable financial instrument representing financial value.1 Securities are broadly categorized into:

  • debt securities (such as banknotes, bonds and debentures),
  • equity securities, e.g., common stocks; and,
  • derivative contracts, such as forwards, futures, options and swaps.

So the first one says securities are a special kind of cash instruments (distinct from derivative instruments) that are readily transferable. The second says securities are fungible and negotiable financial instruments including derivatives.

  1. Are they consistent with each other? If not, what is the definition?
  2. Do securities include derivatives?
  3. Does "transferable" mean the ability to sell the security after its firs purchase? Is it same as "tradable"?
  4. What is the opposite concept to securities?

Thanks and regards!

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1 Answer 1

up vote 5 down vote accepted

First, realize that Wikipedia is written by individuals, just like this board has thousands of members. The two definition were written and edited by different people, most likely. Think Venn diagram. The definition for financial instruments claims that it's the larger set, and securities is contained in a subset.

Comparing the two, it seems pretty consistent. Yes, Securities include derivatives. Transferable is close to tradable, although to me tradable implies a market as compared to private transfers. I don't believe there's an opposite, per se, but there's 'other stuff.' My house has value, but is not a security. My coffee cup has no value. Back to the concept of Venn. There aren't really opposites, just items falling outside the set we're discussing.

I'd caution, this is a semantic exercise. If you know what you're buying, a stock, a bond, a gold bar, etc, whether it's a financial instrument or security doesn't matter to you.

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Staying with the definition you posted, it would appear that the "Other cash instruments and deposits" are not considered securities. This might include my deposits at a bank or private loans that are not yet securitized. –  JoeTaxpayer Sep 18 '11 at 23:51
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What does "securitize" mean? –  Tim Sep 18 '11 at 23:56
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When banks or other financial institutions take, say, a total of $10M in mortgages and create an investment from them, effectively selling a pool of mortgages, this process is called 'securitization.' The concept is sound, until it's run by scoundrels and ne'er-do-wells who try to cheat the system. This happened and lead to the 2008 catastrophe. –  JoeTaxpayer Sep 19 '11 at 0:06
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Well, the base word is "security". A bond is a security. The process is to take stuff that wouldn't otherwise be traded (say, single random mortgages) and bundling them into single products. GNMA, FNMA, and FMAC were among those who did this. So long as the underlying mortgages were properly written, the resulting products were decent investments. How? The agency, say FNMA, buys the mortgages from many banks, and creates that one big bond. This is a great discussion for another question, I suppose. –  JoeTaxpayer Sep 19 '11 at 0:35
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You need to re-read the first bullet point in the definition you posted. Parse it out slowly and the answer is there. I would just be cutting and pasting those same words. Deposits are other cash instruments which are not securities. Cash instrument are financial instruments. –  JoeTaxpayer Sep 21 '11 at 20:32

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