Investment Securities
What Are Investment Securities?
Investment securities are a category of securities — tradable financial assets, for example, equities or fixed income instruments — that are purchased determined to hold them for investment. Rather than investment securities, as a rule, securities are purchased by a broker-dealer or other intermediary for quick resale.
Investment securities are subject to governance through Article 8 of the Uniform Commercial Code (UCC).
Figuring out Investment Securities
Banks frequently purchase marketable securities to hold in their portfolios; these are normally one of two primary wellsprings of revenue, alongside loans. Investment securities can be found on the balance sheet assets of many banks, carried at amortized book value (defined as the original cost less amortization until the current date).
The fundamental difference among loans and investment securities is that loans are generally acquired through a course of direct negotiation between the borrower and lender, while the acquisition of investment securities is regularly through a third-party broker or dealer. Investment securities at banks are subject to capital limitations. For instance, the number of Type II securities or securities issued by a state government is restricted to 10% of the bank's overall capital and surplus.
Investment securities furnish banks with the advantage of liquidity, notwithstanding the profits from realized capital gains when these are sold. Assuming they are investment-grade, these investment securities are frequently able to assist banks with meeting their pledge requirements for government deposits. In this case, investment securities can be considered collateral.
Types of Investment Securities
Equity Stakes
Similarly as with all securities, investment securities held by banks as collateral can appear as equity (ownership stakes) in corporations or debt securities. Equity stakes can be as preferred or common shares — in spite of the fact that it is critical that they give a measure of safety in this case. High-risk, high-reward securities, like initial public offering (IPO) allocations or small gap growth companies, probably won't be proper for investment securities. A few companies offer double class stock, which give distinct voting rights and dividend payments.
Debt Securities
Debt securities can take the common forms of secured or unsecured corporate debentures. (Secured corporate debentures can be backed by company assets, like a mortgage or company equipment). In this scenario, secured debt (additionally called investment-grade) would be preferred. Treasury bonds or Treasury bills and municipal bonds (state, province, municipal issues) are likewise options for a bank's investment securities portfolio. Once more, these bonds ought to be investment-grade.
While securities, as a general rule, incorporate derivative securities —, for example, mortgage-backed securities, whose value is derived from the asset(s) underlying the financial instrument — these are higher risk and not frequently urged to be part of a bank's investment securities portfolio.
Money Market Securities
Different types of investment securities can incorporate money-market securities for quick conversion to cash. These generally appear as commercial paper (unsecured, short-term corporate debt that develops in 270 days or less), repurchase agreements, negotiable certificates of deposit (CDs), brokers' acknowledgments, as well as federal funds.
Features
- Banks frequently purchase marketable securities to hold in their portfolios; these are normally one of two principal wellsprings of revenue, alongside loans.
- Investment securities are a category of securities — tradable financial assets, for example, equities or fixed income instruments — that are purchased determined to hold them for investment.
- Investment securities held by banks as collateral can appear as equity (ownership stakes) in corporations or debt securities.
