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What Are Securities?
A security is a financial instrument that can be traded in a financial market. The term “security” applies to types of investments that are fungible and negotiable, such as mutual funds, bonds, stocks, stock options, and exchange-traded funds (ETFs). Instead of taking out a bank loan, corporations and municipalities can generate new capital by selling securities. Corporations can raise funds by declaring an initial public offering (IPO) to start selling stock shares on the open market, while state and local governments can sell municipal bonds to generate money to pay for large capital projects, such as building roads, schools, and hospitals. The seller of a security is called the issuer, while the buyer is called an investor.
What Is an IPO?
An initial public offering (IPO) is a limited sale of shares in a company that is transitioning from private ownership to public ownership. Institutional investors (such as pension funds and mutual funds) tend to buy the bulk of IPO shares, but public investors also buy shares during the IPO stage.
Some time after the IPO process concludes, the company begins its first day of trading on public exchanges such as the New York Stock Exchange and NASDAQ. From this point onward, the company's stock is on the open market, available to anyone from exchange-traded funds (ETFs) to Wall Street hedge funds to individual private investors who purchase shares through a brokerage.
How Are Securities Traded?
Investors can purchase publicly traded securities on stock exchanges, such as the NASDAQ and New York Stock Exchange. If a stock isn't listed on one of the main stock exchanges, investors can also purchase securities directly from the issuer, which is called over-the-counter trading. In the U.S., it's the job of the U.S. Securities and Exchange Commission to regulate the securities market and protect investors against stock market manipulation.
After a company's initial public offering (IPO), investors can buy and sell the securities on the secondary market. The secondary market means that new investors can only purchase securities from current shareholders. When current shareholders sell their securities, they're selling to other investors, ideally for capital gain, meaning they sell their securities for more than they initially bought them for.