Securities is a broad term that includes many different types of investment interests. Securities represent debt or ownership, generally in a company, but may also be issued by the U.S. government. Bonds are a type of security that behave differently from other securities, such as stocks and mutual funds. Each different type of security has advantages and disadvantages, and must be evaluated carefully by the investor according to his individual goals.
Bonds are a type of security called a debt instrument. When an organization issues a bond, it issues a certificate stating that it promises to pay a certain amount of money on a certain date. Bonds do not represent an ownership in the company, but are often collateralized by the assets of the issuer. Returns are guaranteed at the stated interest rate, but only by the financial ability of the issuer to repay the bond.
Securities also include contracts or certificates that designate an ownership interest, or equity, in a company. The most common forms of these securities are stock certificates or shares in a stock mutual fund. In exchange for the purchase price, the investor receives ownership of a part of the company. While many stocks have a history of paying regular dividends, the company does not guarantee future payments. Also, the stock selling price may increase and decrease, depending on economic conditions and the financial state of the company.
An investment contract defines a security according to certain criteria. These definitions have been set by the U.S. Securities and Exchange Commission, and have been reaffirmed by the U.S. Supreme Court. An investment contract requires the investment of money in a common enterprise, with the expectation of profits from other people's efforts. It is unlawful to sell or offer for sale any unregistered securities that are not specifically exempt from the law.
Many different types of bonds are issued by the U.S. government, as well as state and local governments. U.S. savings bonds may be the most famous of all types of government bonds, and may be purchased at a local bank. Many state and municipal bonds offer interest that is free of federal income taxes. The tax-free nature of these bonds allows governments to finance capital improvements with lower interest rates, as the lower rates are offset by the lack of income taxes.