What is Security?

The term "security" is a fungible, negotiable financial instrument that holds some type of
monetary value. It represents an ownership position in a publicly-traded corporation—via stock
—a creditor relationship with a governmental body or a corporation—represented by owning that
entity's bond—or rights to ownership as represented by an option.

A financial security is a document of a certain monetary value. Traditionally, it used to be a

physical certificate but nowadays, it is more commonly electronic. It shows that one owns a part
of a publicly-traded corporation or is owed a part of a debt issue. In the most common parlance,
financial securities refer to stocks and bonds which are negotiable.

FEATURES OF FINANCIAL SECURITIES

1. One of the most important features of financial securities is that they are trade-able i.e.
one can convert them into cash quite easily.
2. Holding a financial security gives a right to the holder to receive future monetary benefits
under a stated set of conditions.
3. Except for derivatives, securities let you own the underlying asset without taking physical
possession.
4. The price of the securities indicates the value of an underlying asset. More the price,
higher is the value of the asset.

Categories of Security
Securities can be broadly categorized into two distinct types: equities and debts. However, you
will also see hybrid securities that combine elements of both equities and debts.

Equity Securities
An equity security represents ownership interest held by shareholders in an entity (a company,
partnership or trust), realized in the form of shares of capital stock, which includes shares of both
common and preferred stock. Holders of equity securities are typically not entitled to regular
payments—although equity securities often do pay out dividends—but they are able to profit
from capital gains when they sell the securities (assuming they've increased in value, naturally).
Equity securities do entitle the holder to some control of the company on a pro rata basis,
via voting rights. In the case of bankruptcy, they share only in residual interest after all
obligations have been paid out to creditors. They are sometimes offered as payment-in-kind.

Debt Securities
A debt security represents money that is borrowed and must be repaid, with terms that stipulates
the size of the loan, interest rate, and maturity or renewal date. Debt securities, which include
government and corporate bonds, certificates of deposit (CDs) and collateralized securities (such
as CDOs and CMOs), generally entitle their holder to the regular payment of interest and
repayment of principal (regardless of the issuer's performance), along with any other stipulated
contractual rights (which do not include voting rights). They are typically issued for a fixed term,
at the end of which they can be redeemed by the issuer. Debt securities can be secured (backed
by collateral) or unsecured, and, if unsecured, may be contractually prioritized over other
unsecured, subordinated debt in the case of a bankruptcy.

DERIVATIVE SECURITIES
Derivative securities are those securities whose value is derived from an underlying asset. These
underlying assets can be bonds, stocks, commodities, currencies or other assets. These securities
trade on exchanges like other financial securities and their value differ with a change in the value
of an underlying asset. They themselves have no value of their own. One must note that
ownership of a derivative does not mean ownership of an asset. Derivative securities are more
sophisticated as compared to equity and debt securities. They work in a very different manner
and therefore require sound financial knowledge to mitigate risk and earn good returns.

Derivative securities are also known as derivatives. Their most common use is containing risk.
Such risks can be currency fluctuation risks, movements in index or commodities prices, adverse
changes in rates of interest, weather, etc to name a few. There are several types of derivatives
available in the market, in accordance with the needs of the customers. Broadly, derivatives can
be classified as Futures, Forwards, Swaps, and Options.

Hybrid Securities
Hybrid securities, as the name suggests, combine some of the characteristics of both debt and
equity securities. Examples of hybrid securities include equity warrants (options issued by the
company itself that give shareholders the right to purchase stock within a certain timeframe and
at a specific price), convertible bonds (bonds that can be converted into shares of common stock
in the issuing company) and preference shares (company stocks whose payments of interest,
dividends or other returns of capital can be prioritized over those of other stockholders).

What is Security Analysis?

Security analysis refers to the method of analyzing the value of securities like shares and other
instruments to assess the total value of business which will be useful for investors to make
decisions and there are three methods to analyze the value of securities like fundamental
analysis, technical analysis, and quantitative analysis.

Reasons for Security Analysis

The basic target of every individual is to increase its Net Worth by investing its earnings into
various financial instruments i.e. creation of money using the money. Security analysis helps
people achieve their ultimate goal as discussed below:

Returns
The primary objective of the investment is to earn returns in the form of capital appreciation as
well as yield.
Capital Gain
Capital Gain or appreciation is the difference between sale price and purchase price.

Yield
It is the return received in the form of interest or dividend.

Return = Capital Gain + Yield

Risk
It is the probability of losing the principal capital invested. Security analysis avoids risks and
ensures the safety of capital, also creates opportunities to outperform the market.

Safety of Capital
The capital invested with proper analysis; avoids chances to lose both interest and capital. Invest
in less risky debt instruments like bonds.

Inflation
Inflation kills one’s purchasing power. Inflation over time causes you to buy a smaller
percentage of good for every dollar you own. Proper investments provide you hedge against
inflation. Prefer common stocks or commodities over bonds.

Risk-Return relationship

The higher the potential return of an investment, the higher will be the risk. But higher risk
doesn’t guarantee higher returns.

TYPES OF SECURITY ANALYSIS

Considering the nature of securities, security analysis can broadly be performed using the
following three methods:
Fundamental Analysis
This type of security analysis is an evaluation procedure of securities where the major goal is to
calculate the intrinsic value of a stock. It studies the fundamental factors that effects stock’s
intrinsic value like profitability statement & position statements of a company, managerial
performance and future outlook, present industrial conditions and the overall economy.
Technical Analysis
This type of security analysis is a price forecasting technique that considers only historical
prices, trading volumes and industry trends to predict future performance of the security. It
studies stock charts by applying various indicators (like MACD, Bollinger Bands, etc) assuming
every fundamental input has been factored into the price.

Quantitative Analysis
This type of security analysis is a supporting methodology for both fundamental and technical
analysis which evaluates the historical performance of the stock through calculations of basic
financial ratios e.g. Earnings Per Share (EPS), Return on Investments (ROI) or complex
valuations like discounted cash flows (DCF).

Security Analyst

A security analyst is a financial professional who studies various industries and companies,
provides research and valuation reports, and makes buy, sell, and/or hold recommendations.
Security analysts follow the performance of one or more stocks, sectors, industries, or economies
in the market. A security analyst runs fundamental and/or technical analysis on securities in the
market in order to help retail and institutional investors make investment decisions. Fundamental
analysis relies on the fundamental business factors such as financial statements, and technical
analysis focuses on price trends and momentum. The evaluations run by a security analyst
determines whether s/he puts out a buy, sell, or hold recommendation in the financial markets.

Duties of a Security Analyst

a. Perform financial forecasting, reporting, and operational metrics tracking

b. Analyze financial data and create financial models for decision support
c. Report on financial performance and prepare for regular leadership reviews
d. Analyze past results, perform variance analysis, identify trends, and make
recommendations for improvements
e. Work closely with the accounting team to ensure accurate financial reporting
f. Evaluate financial performance by comparing and analyzing actual results with plans
and forecasts
g. Guide the cost analysis process by establishing and enforcing policies and procedures
h. Provide analysis of trends and forecasts and recommend actions for optimization
i. Recommend actions by analyzing and interpreting data and making comparative
analyses; study proposed changes in methods and materials
j. Identify and drive process improvements, including the creation of standard and ad-hoc
reports, tools, and Excel dashboards
k. Increase productivity by developing automated reporting/forecasting tools
l. Perform market research, data mining, business intelligence, and valuation comps
m. Maintain a strong financial analysis foundation creating forecasts and models
n. Proficiency with Microsoft Excel is mentioned in virtually any financial analyst job
description; familiarity with data query/data management tools is extremely helpful
(Access, SQL, Business Objects)