Definitions
A security is defined as a
fungible,
and negotiable
financial instrument
with value. Owning a
security
means that you have an ownership stake, a creditor relationship, or the rights to ownership to a
particular entity.
Let's look at what each of those 3 cases means.
An ownership stake is fairly simple, where you own a piece of a corporation, either a public one
acquired through a
stock market,
or a private one through a private relationship, and confers to you
a fractional ownership of the company in question, with the rights and responsibilities associated.
This is done in the form of
stock.
A creditor relationship is a bit more complex. This is done with a
bond,
which can be made with
either a corporation, or a governmental body. A
bond
confers the right to a guaranteed payment, barring
complications, at a further date, as defined by the contractual terms of the
bond
upon maturation.
The rights to ownership confers the ability to buy or sell a set amount units of a particular
security
to another entity. When used in the context of the
stock market,
each contract standardly represents 100 shares. However, in order to fully exercise an
option,
the terms of the contract must be met. An
option
has both a
strike price
and an
expiration date,
which each serves as a trigger, and allows the
option
contract holder to fully exercise their right to buy or sell 100 shares based on the contractual
terms. However, provided there is a taker, a person has the right to trade away the
option
contract before the
expiration date
as these contracts themselves are priced, and must be purchased, which is called the premium.
The value of a contract over its lifetime can be modeled using the
Black-Scholes Equation
and we have included such simulator tools in this site as well.
Fungibility refers to the ability for an asset to be exchanged for another asset of the same type. It is
because of fungibility that we can trade as easily as we do today, because fungibility implies equal value
between the assets. Think about different value dollar bills. It doesn't matter if five $1 Bills are combined
to $5, or if a single $5 bill is used.
Stock
and
options
function in much the same way, because it doesn't matter when you bought a share of a particular company, as it
can be exchanged for money, provided that there is a buyer, or another share bought any time. Similarly, an
option
contract can be used to represent 100 shares of
stock.
A financial instrument is a monetary contract that can be created, traded, or modified. An example of such an
instrument from everyday life is a check, because it functions in the same way, as a promise to pay, in lieu of
using dollar bills directly. Similarly,
stocks
and
options
are evidence of ownership. Additionally,
bonds
are contractual rights to receive cash at a later date. Simply put, a financial instrument is representative of
another asset or capital that is exchangeable or tradeable. It allows for one entity to create an asset and the
counterparty entity to create a liability. In accounting terms, this encompasses, cash, deposits, loans,
trade receivables, loans, and investments in debt, shares, and equity.
Also known as equity, stock is a
security
that is representative of owning a part of a corporation. An individual unit is referred to as a single share,
and entitles the owner to that fractional claim on its assets and earnings. Assets refers to what a company owns
and earnings refer to what a company generates in profits. In a theoretical example, ownership of one unit of
stock in a company with one-hundred shares is representative of 1% ownership in said company. However, most
companies have outstanding share counts in the millions and billions, regardless of the individual value of each
unit of stock.
Not all shares in a company are the same, generally differentiated as common and preferred stock. The word
"equities" in particular is used to represent common shares, which generally have a combined market value and
trading volume that is much higher than that of preferred shares. Ownership of common shares generally means
that the owner of said common shares has voting rights for considerations like elections to the board of
directors, or for the appointment of auditors, through mechanisms like the annual general meeting. These are
differentiated from preferred stock because those shares have a priority in receiving dividends and assets if
a liquidation happens, generally at the expense of voting rights. Some companies may have much more complex
structures that differentiate the concentration of voting rights, or even the class of stock itself, but those
are concerns beyond the scope of this site.
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Fungibility refers to the ability for an asset to be exchanged for another asset of the same type. It is
because of fungibility that we can trade as easily as we do today, because fungibility implies equal value
between the assets. Think about different value dollar bills. It doesn't matter if five $1 Bills are combined
to $5, or if a single $5 bill is used.
Stock
and
options
function in much the same way, because it doesn't matter when you bought a share of a particular company, as it
can be exchanged for money, provided that there is a buyer, or another share bought any time. Similarly, an
option
contract can be used to represent 100 shares of
stock.
Fungibility refers to the ability for an asset to be exchanged for another asset of the same type. It is
because of fungibility that we can trade as easily as we do today, because fungibility implies equal value
between the assets. Think about different value dollar bills. It doesn't matter if five $1 Bills are combined
to $5, or if a single $5 bill is used.
Stock
and
options
function in much the same way, because it doesn't matter when you bought a share of a particular company, as it
can be exchanged for money, provided that there is a buyer, or another share bought any time. Similarly, an
option
contract can be used to represent 100 shares of
stock.
Fungibility refers to the ability for an asset to be exchanged for another asset of the same type. It is
because of fungibility that we can trade as easily as we do today, because fungibility implies equal value
between the assets. Think about different value dollar bills. It doesn't matter if five $1 Bills are combined
to $5, or if a single $5 bill is used.
Stock
and
options
function in much the same way, because it doesn't matter when you bought a share of a particular company, as it
can be exchanged for money, provided that there is a buyer, or another share bought any time. Similarly, an
option
contract can be used to represent 100 shares of
stock.
Fungibility refers to the ability for an asset to be exchanged for another asset of the same type. It is
because of fungibility that we can trade as easily as we do today, because fungibility implies equal value
between the assets. Think about different value dollar bills. It doesn't matter if five $1 Bills are combined
to $5, or if a single $5 bill is used.
Stock
and
options
function in much the same way, because it doesn't matter when you bought a share of a particular company, as it
can be exchanged for money, provided that there is a buyer, or another share bought any time. Similarly, an
option
contract can be used to represent 100 shares of
stock.
Fungibility refers to the ability for an asset to be exchanged for another asset of the same type. It is
because of fungibility that we can trade as easily as we do today, because fungibility implies equal value
between the assets. Think about different value dollar bills. It doesn't matter if five $1 Bills are combined
to $5, or if a single $5 bill is used.
Stock
and
options
function in much the same way, because it doesn't matter when you bought a share of a particular company, as it
can be exchanged for money, provided that there is a buyer, or another share bought any time. Similarly, an
option
contract can be used to represent 100 shares of
stock.
Fungibility refers to the ability for an asset to be exchanged for another asset of the same type. It is
because of fungibility that we can trade as easily as we do today, because fungibility implies equal value
between the assets. Think about different value dollar bills. It doesn't matter if five $1 Bills are combined
to $5, or if a single $5 bill is used.
Stock
and
options
function in much the same way, because it doesn't matter when you bought a share of a particular company, as it
can be exchanged for money, provided that there is a buyer, or another share bought any time. Similarly, an
option
contract can be used to represent 100 shares of
stock.
Fungibility refers to the ability for an asset to be exchanged for another asset of the same type. It is
because of fungibility that we can trade as easily as we do today, because fungibility implies equal value
between the assets. Think about different value dollar bills. It doesn't matter if five $1 Bills are combined
to $5, or if a single $5 bill is used.
Stock
and
options
function in much the same way, because it doesn't matter when you bought a share of a particular company, as it
can be exchanged for money, provided that there is a buyer, or another share bought any time. Similarly, an
option
contract can be used to represent 100 shares of
stock.
Fungibility refers to the ability for an asset to be exchanged for another asset of the same type. It is
because of fungibility that we can trade as easily as we do today, because fungibility implies equal value
between the assets. Think about different value dollar bills. It doesn't matter if five $1 Bills are combined
to $5, or if a single $5 bill is used.
Stock
and
options
function in much the same way, because it doesn't matter when you bought a share of a particular company, as it
can be exchanged for money, provided that there is a buyer, or another share bought any time. Similarly, an
option
contract can be used to represent 100 shares of
stock.
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