Why To Invest in Securities? Definition and Tips

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Understanding Securities.

The Advantages of Investing in a Securities Market

The Advantages of Investing in a Securities Market

The reasons why most people are looking to invest their money in hopes of getting a profitable return; are fairly common for all. These goals and ambitions range from college fees, house building funds or for launching a new business idea.

For this purpose one of the options that investors can pursue is to invest in securities.

There are several reasons why securities are being considered a lot by people nowadays. But before we proceed any further, we need to lay down some basic principles in order to distinguish which particular product can be considered a security.

The first rule is that the investment must be made in the form of money for it to be considered a security. Secondly, it must be specific. This means that the investment should be goal oriented and carter to one particular objective. Then, it is needless to say that the investment must have a considerable chance of returning profits. And finally, the definition is concluded by stating out the fact that it is imperative that the returns should come from the efforts put in by someone other than the person who has invested the money.

Different kinds of securities, you should know about.

Now that we have identified what constitutes a security, we can now move on towards the classification the said securities. Primarily, securities can be classified into two groups. One is equity security group and the other is the debt security group.

Equity security basically means that the investors put his/her money into a number of companies and become a partial owner of those particular firms. And then the profits are reaped from the initial amount that was invested. The profits that are generated from such kind of investments are known as dividends. These are much dependent on the capability of the management of the firms because a well-organized firm will have a better chance of generating profits.

On the other hand debt security relates to the lending of money to different organizations. However the return that you get on such investments is known as interest. Again, capable management teams go a long way in ensuring the return on your investment.

The major difference between the two types is that for equity the investors become partial owners of the firm. While on the other hand, for debt securities, the investors are known as creditors. Now at first sight it may seem as though equity securities are better, but on the contrary, when the time of payment arrives, the creditors are on the front of the queue. This is because when you become the owner of a particular firm, the responsibility falls upon you to clear all the liabilities of the firm.

The Risks Involved

There is risk involved in both kinds of securities. The investors in equity run the same risk as the investor in debt securities. If the management team is not up to the mark, then the partial owners might lose their investment as the firm goes bankrupt. This is known as capital risk. On the other hand, there is credit risk which again means that the creditors might end up losing the money that they had put in. However, there is always a higher chance of earning profits and that is what keeps the people motivated to invest in securities.

To invest in the stock market, it is no longer necessary to go to a bank office, or to the office of our trusted trader. With the rise of increasingly new technologies, opt to manage all operations over the Internet. And what do you have to do to invest in the market from home? We summarize some practical tips to achieve this:

1. Choosing an online broker

To invest on the Internet, the first thing to do is to have an online broker, that is, a financial intermediary from whose platform the trading operations can be carried out. You can opt for a specialized company or the banks, since they all have mechanisms to operate in real time. On the website of the National Securities Market Commission (CNMV) we find a list of companies and brokerage firms that can be useful and which avoids falling into the networks of so-called financial chiringuitos.

2. Decide the product of the investment

Not only is it possible to invest in the stock market via the Internet, but other more complex financial products, such as futures or options, are also available. And all this without any borders: you can invest in a company listed on the Spanish stock market or in any other market in the world, large or small.

3. Open an account

Once we have decided on what product we are going to invest and from what type of platform, the investor has to open a stock account. This account will be associated with a bank that houses the money necessary to materialize a purchase order and the recipient to collect the dividends or what we win with the sale of the shares. The chosen entity will provide us with user keys and operating codes to be able to operate online.

4. Know the expenses and commissions

All operations carried out in the Spanish market are subject to a series of costs and commissions, which must be reflected in the contract signed by the customer when the securities account is opened. The current regulations oblige intermediaries to publish their rates and send them to the CNMV, so that the investor will know from the outset what expenses are faced. There are three types of expenses:

A) Cost of intermediation: this is what the financial institutions charge for each operation, depending on the signature will mean between 0.25% and 0.35% of the effective amount, although the brokers who offer their services over the Internet usually charge something less.

B) Stock fees: this commission is fixed each year by the regulator, although the amount is always proportional to the cash that moves in the operation. That is, the larger the transaction, the greater the fee to pay. If the transaction is less than 300 euros, the fee applied is 1.1 euros, while transactions over 140,000 euros are subject to a fee of up to 13.4 euros.

C) Costs of custody or administration of securities: this fee is that charged by the entities for holding shares in the portfolio. It is usually about 0.25% per annum over the nominal value of the custodian securities, although the most frequent is to pay each quarter.

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