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Communicating Objectives Upon completion of this lesson, you will be able to tell what securities are and distinguish between debt and equity securities. You’ll be able to explain the origins of stock, the history of Wall Street, and name the five largest stock exchanges in the world. You will also be able to summarize the key responsibilities of the Securities and Exchange Commision.
Presentation of Content What’s a security? A security is a tradable financial instrument that represents financial value .
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Equity Securities. In the last lesson you learned about shares in a corporation. Shares of stock represent a portion of ownership (equity) in a company. Shares are also referred to as securities . Since they represent equity they are called equity securities . Debt Securities. There are also tradable financial instruments called debt securities . They evidence ownership of a debt – like an IOU. Equity Securities vs. Debt Securities Both debt and equity securities are tradable (negotiable) financial instruments meaning they can be transferred from owner to owner. Both are bought and sold through securities exchanges. Other than that, debt and equity securities are very different from one another. Let’s compare: Equity securities are shares in a corporation which represent an equity (ownership) interest in that corporation. When an investor buys stock, they actually own a piece of the corporation . If you went out today and invested in one share of Google Corporation, you would own a tiny piece of that company – just a teeny, tiny piece (like 1/700,000,000th) because Google has about 700 million shares outstanding, but an ownership interest nonetheless. There are two kinds of stock: common and preferred . Both common and preferred shareholders are entitled to share in the profits of the corporation. Distribution of profit is made by dividend . Get this: Preferred shareholders receive regular dividend payments, but with regard to common stock, there is no requirement that a corporation pay a dividend . Common stock dividends are declared at the discretion of the board of directors. Most stock issued by a corporation is common stock. Shareholders do not get rich off dividends because they usually consist of just a small amount, like 50 cents per share. Investors hope the value of their stock will increase as the value of the company increases through sales revenue, product innovation, and efficient operation. Debt securities are called notes and bonds . Like stock, notes and bonds are tradable (negotiable) financial instruments with value. Notes and bonds are forms of debt – basically IOU’s. If a corporation or government issues a note or bond, it is in effect, borrowing money . The person who bought the note or bond (called the noteholder PRODUCT PREVIEW
261 THE 21st CENTURY STUDENT’S GUIDE TO FINANCIAL LITERACY
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