What is a negotiable security and how are they related to derivatives?

Question

From Wikipedia, security is defined as:

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.

My questions are:

1. What does "negotiable" mean here? Those available for me to buy through my brokery company such as Fidelity all have their prices not negotiable to me. Whether I buy a security depends on whether I accept its price, and I have no right to ask for a lower price.

2. From 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 entity such as an Asset an Index or an Interest Rate. They can be divided into exchange-traded derivatives and over-the-counter (OTC) derivatives.

   As I understand, it says securities and derivatives do not overlap. Is this contrary to the definition of securities?

Thanks and regards!

Answer 1

As Dheer pointed out, Wikipedia has a good definition of what a negotiable instrument is.

A security is an instrument or certificate that signifies an ownership interest in something tangible. 1 share of IBM represents some small fraction of a company. You always have the ability to choose a price you are willing to pay -- which may or may not be the price that you get.

A derivative is a level of abstraction linked by a contract to a security... if you purchase a "Put" contract on IBM stock, you have a contractural right to sell IBM shares at a specific price on a specific date. When you "own" a derivative, you own a contract -- not the actual security.

Answer 2

The price for securities is negotiable. You totally have a right to make a lower offer when buying or ask for a higher price when selling. Securities don't trade at a fixed price, the price goes up and down throughout the day based on the price offers made by buyers and sellers and where they find agreement.

If a stock last traded for $10, someone can put out an offer to buy the stock at $9.50, if they find someone who wants to sell and will accept that price, then a deal is made. unless something is falling rapidly in price however, an offer that far below the last price is not terribly likely to be accepted.

Now if you want to be assured of making a sale or purchase, you generally trade 'at the market' and for small time players that is very much encouraged as it makes it easier for everyone.

Answer 3

negotiability is a legal concept that permits free transfer of a security without the requirement of prior consent of the issuer. that means the issuer must pay the current holder of the security, irrespective of who he is. negotiability also protects a good faith buyer of the instrument from adverse ownership claims of purported prior holders of the instrument. it is not related to "negotiating" the price or whatnot. A negotiable security means the current owner does not have to be concerned about acquiring the asset via a bad chain of title b/c he can always assert that he is a "holder in due course" defense against such claims, and have absolute security in his ownership right over the asset. securities and derivatives are different. securities are transferrable instruments representing a direct claim on the issuer for the value of the security, whether debt or equity ownership. derivatives are bilateral contracts, which can only be entered into with the consent of both parties, and can only be transferred by such consent. derivatives represent a claim against the parties of to the derivative that depends on some economic reference which is outside of the financial condition of the two parties to the contract, such as interest rates, FX rates, commodity prices, etc.