What are stocks?

What are securities? — Bonds, stocks, funds or participation certificates explained!

Put simply , a security is a piece of paper that has a certain privilege linked to its ownership, such as a share in a company or a payment. Thus, a check is also a security, in a broader sense also a savings book and even a bank note. Colloquially, however, it usually refers to securities that are traded on the stock exchange, such as bonds, stocks, funds or participation certificates . They are traded on the stock exchanges.

Security definition

A security is a document to which a certain right is bound. For example, the owner of a share is a shareholder in a company. If he sells the security, the company share with all privileges such as voting and dividend rights is transferred to the new owner. On the other hand, it looks different with a birth certificate. If Thomas Müller were to sell his birth certificate, the new owner would neither be Thomas Müller himself nor his owner or the new husband of his wife. So a birth certificate is not a security.

In a broader sense , a bank note is also a security, because the owner has the right to buy with it; checks and bills of exchange also belong to this group. A savings book is also a security , since the book certifies the payment of the respective credit. When you talk about securities and securities trading, you usually mean bonds and stocks , possibly also certificates, funds, ETFs or profit participation certificates.

Securities are documents whose possession is linked to a right, such as the payment of a sum of money or the right to vote and dividend shares in the case of shares.

What is the difference between bonds and stocks?

Exclamation markStocks are the best known securities. They represent the stake in a company. Shareholders are therefore co-owners of the company . Capital that is received in the course of issuing shares is therefore equity. Bonds, on the other hand, are interest-bearing securities. Their owners do not become the owners of the company and therefore have no voting rights at the general meeting. Instead of a dividend, the amount of which is determined by the general meeting depending on the economic situation, they usually receive a fixed interest rate. Bonds are thus debt capital.

Stock trading

What are stocks?

Other important securities are certificates, which, like bonds, belong to the group of bonds. However, the return and, in some cases, the repayment value are not fixed, but mostly depend on the development of other factors, for example the value of a share. Certificates are usually issued by banks. Various strategies can be applied via this. For example, investors could earn money by buying a discount certificate, even though the underlying asset is only moving sideways or even falling slightly.

One shareholder is a co-owner of the stock corporation

He is therefore entitled to a say at the general meeting as well as a share of the business profit (dividend)
From the company’s point of view, bonds are loans that they take out on the capital market
In return, the bond holder receives a (usually) fixed interest rate; however, he does not become a co-owner of the company.

Shares represent a share in a company (equity), bonds are debentures (debt). Certificates are also bonds of the issuer. However, their type of repayment is usually linked to certain factors, such as the price development of a share.

Trade securities

Trading the nature of a security becomes clear when one remembers earlier times when stocks were often issued in paper form. Some of these effective pieces still exist today, with the so-called coat certifying the share in the company. The sheet consists of numerous coupons and a coupon. The coupons have been cut off and are mainly used to allow the dividend to be paid out. A new sheet is issued with the coupon when the coupons are used up. Only the possession of the security legitimizes the shareholder as a partner in the company , he is not listed as a partner in the stock corporation (apart from so-called «registered shares»). That made trading in it easyAnyone who wanted to sell their stake in a company simply passed the share on to the new owner .

Listed securities can be traded on the stock exchange

Whoever is in possession of the share or the bond has the right which arises from the securities
Today, securities such as stocks or bonds are electronically stored and traded.
Today, shares are seldom handed out as effective pieces («over the counter»). There are also some restrictions on tradability, so (rarely occurring) registered shares with restricted transferability may only be transferred if the stock corporation agrees. Nevertheless , the ease of transferability is still a major strength of the share today . In this context, investors have often heard the term share portfolio . The stock portfolio definition basically looks like that the portfolio is an account on which securities can be managed and kept. Securities that are traded on the stock exchange are no longer traded as real pieces, but kept electronically.

What are securities?

However, not all stock corporations are also traded on the stock exchange. The shares in Hamburger Sparkasse, for example, are 100 percent owned by Haspa Finanzholding, a legal entity under old Hamburg law, similar to a foundation. In the end, the Sparkasse belongs to itself. The Deutsche Bahn share cannot be traded on the stock exchange either. Although it is a public company, the securities are 100 percent owned by the state.

  • Far from all securities are traded on the stock exchange
  • Not all public companies are listed on a stock exchange (such as Huawei shares )
  • Often only a certain percentage of all shares in a company are available for trading

Securities are easy to trade on stock exchanges — and are therefore often bought and sold. However, not every stock corporation is also listed on a stock exchange. Registered shares with restricted transferability, which occur very rarely, are also subject to the approval of the stock corporation when they are sold.

The ups and downs of the courses strategy

Anyone who knows that stocks are shares in companies also understands why the price can fluctuate sharply . If the company is successful, many investors want to buy their shares, but only a few want to sell. The share therefore becomes more expensive and the price rises. The same thing happens when the whole economy is doing well. However, the demand for a certain share increases not only when the company is doing well, but when it offers advantages that other forms of investment or companies do not have. Dividends are an example here . Dividends are a distribution made by companies to their shareholders. In the course of the ECB’s low interest rate policy, investors hardly get any return on traditional investments. As a result, the demand for stocks that pay a continuous dividend has risen sharply in recent years, which in turn has greatly increased their price.

Prices fluctuate based on supply and demand

If a company is doing well, the demand and with it the price usually increase
If a company is in trouble, demand drops and so does the price
The value of bonds also fluctuates, albeit less strongly. The price can fall, for example, if bondholders fear that the issuing company or the state could go bankrupt and fail to repay the bonds. Changes in interest rates are often responsible for changes in exchange rates . If interest rates fall, the 4.0 percent bond suddenly becomes attractive to investors when new securities with the same risk only offer 3.0 percent interest. The value of the bond therefore rises until the expected return equals that of comparable investments. And of course, in addition to hard facts, psychology also plays a role.

The prices of bonds also fluctuate

If the interest rate rises, the price falls (vice versa)
Even if the price falls during the term, investors are entitled to the full nominal amount (100%) at the end of the term.
If investors fear that the company / government will not be able to repay the bond, the price will also fall
The change in prices reflects the changing expectation of making profits with the security. The ups and downs on the stock market, whether in the stock or bond markets, have no direct impact on the company as such. A company that issues shares once receives the capital. It is up to the owner of the share what to do with the security.
Image historical stock exchange prices

What does that mean for me as an investor?

NewsThe purchase of securities is by no means just a game of chance, but an investment in a company ; the change in prices is not a coincidence, but is based primarily on business or economic developments. According to proponents of the efficiency market hypothesis , it is therefore irrelevant which paper an investor buys. All known information is already included in the price, each share is worth just as much as the underlying company. According to this theory, above-average profits are only possible with luck. So you can confidently choose your stocks at random — or better: buy an exchange-traded fund that simply tracks an index. These so-called passive ETFsare currently becoming more and more popular and can be purchased on the stock exchange like stocks. At least that is the thesis of these followers.

Securities trading is not a game of chance, it is based on hard facts.

What are securities?

What are stocks?

How do you earn money with securities?
We touched on it a little in the previous section. Many investors want to make money with securities . From the private investor’s point of view, there is hardly any other reason. Because he will probably never own so many shares that he has a noticeable influence in the form of voting rights. Put simply, there are two ways to make money with securities:

Realization of price gains

Payouts in the form of dividends or interest
Often times, when people think of making money with securities, they only think of the first point. And it is also true that a large part of the return can be realized with price gains . At this point I would like to point out that this is only a «real» profit if it has actually been realized. As long as it is only book profits , there is always the risk that these can also melt away again. It is the same, of course, with losses. As long as losses are “only” book losses , they do not yet affect the wallet.

The second way of making money with securities is mostly neglected. Dividends from a stock corporation can make a significant contribution to the performance of a portfolio. In particular, stock corporations that have been paying stable dividends for years or even decades can also have a stabilizing effect on the portfolio. There are even companies that have been increasing their dividends every year for decades. This means that the dividend yield increases every year for the investor. This is, of course, a long-term method of making money from stocks.

US companies often distribute quarterly

Investors receive a regular income with dividends and interest payments
Put simply, there are two ways to earn money with securities: through price gains and through receiving dividends or interest. If you want to build up a regular income , you should look more closely at stocks that pay dividends on a sustainable basis. For example, if you save in 10 different stocks a month (often possible for as little as 25 euros), you can receive a distribution every month, since most US companies such as Apple, Coca Cola, etc. pay dividends four times a year. The aspect of price gains only plays a subordinate role.

Find the right broker for trading securities

But no matter what the buying and selling decisions of an investor are based on, a cheap and reliable broker is always the prerequisite for successful trading . In our stock portfolio comparison we list a number of providers who are particularly recommended for stock trading. In general, however, investors should consider beforehand which securities they want to trade at all. If you only trade shares directly, you need a different broker than a trader who is active in CFD trading , although CFDs do not belong to the class of securities. It also plays a role how often securities and on which exchange they are traded.Some investors like to buy stocks on their home markets. But not every broker offers securities trading abroad.

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