A Quick Overview of 3 Types of Securities - TheBooMoney (2024)

The humanitarian meeting came out with different forms of financial dealings, starting with barter and reaching securities, where barter was the first means of exchange for the purpose of fulfilling needs, and with the expansion of transactions, money appeared as an intermediary that has substantial advantages over the barter system. Money continued to play its role in commercial operations until some difficulties appeared so money have become unable to carry out exchanges on its own, and there had to be other means that help in fulfilling the commercial and financial operations of individuals. The developments have continued gradually until we got to new financial instruments, which are securities.

Despite the widespread of use of these securities, many people still cannot distinguish between them. In this article, we will overview at different types of commonly used financial instruments.

Definition of Financial Securities

Securities are negotiable instruments that involve a form of value, representing part of the ownership of a commercial company “shares”, or a debt relationship, i.e. the relationship between a creditor and a debtor, between the security holder and the issuing organization, whether it is a government or private organization.

From the above it appears that securities can be classified according to what they are to:

1. Securities represent part of the ownership, such as stocks and the Sukuk
2. Securities representing a debt relationship, such as bonds

Also Read: the Commercial Papers: What You Need to Know about it

Types of securities

First: Stocks

Shtocks are considered the most famous type of securities, they are certificates that are equal in value, tradable in commercial ways, representing the right of the shareholder in the company that he shares in his capital and gives its owner the authority to practice his rights in the company.

Shares Properties

1. The shares represent ownership in the capital of the company, and this results in its entitlement to profits if they are realized, and it carries losses if they are realized, and it also gives him the powers to participate in the company’s management through the shareholders’ general assembly.
2. Equal value: the company’s capital is divided by the number of shares, the value of all shares is equal, meaning equal rights as long as they are of one type.
3. The indivisibility of the share: that is, the shareholders do not multiply in front of the company. If the ownership of the share is transferred to partners as a result of the heritage, will or giving, their ownership of the share is correct, but they must choose one person representing them in front of the company.
4. Shares are negotiable, as their ownership can be transferred either by physical delivery if the share is to its holder, or by assigning it to someone else that is recorded in a record in the shareholders register.
5. The issuance of shares is an important job in establishing companies, because it helps individuals participate in the formation of corporate capital, and helps companies in the stage of establishment or expansion by increasing capital when needed.

Reasons for issuing shares

1. Increase the financial liquidity of companies to face financial crises.
2. Funding new projects.
3. Developing existing projects by increasing the company’s capital.

Second: Bonds

Bonds represent a borrowing process by companies or entities through the issuance of negotiable instruments, the owner of which deserves an agreed fixed interest in addition to its nominal value at the end of the loan term, companies are allowed to issue them on terms.

Bonds properties

1. The holder of the bond is considered a creditor of the company and is not a shareholder in the ownership.
2. Bonds are instruments that are issued with equal par value, which cannot be subjected for distribution in front of the organization that issued it.
3. The owner of the bond has the right to redeem the value of the bond at the end of the period, in addition to the fixed interest on it, whether the company has achieved profits or not.
4. The owner of the bond has no right to intervene or participate in the management of the company.
5. The right to trade, the owner of the bond has the right to trade his bond in accordance with the form of the bond.

Types of bonds

The bonds are divided in terms of the issuer

1. Bonds issued by establishments and companies with the aim of financing medium-term and long-term investments
2. Government bonds, which are called Treasury Bonds.
3. Bonds issued by international organizations

The companies tend to use the bonds because they are debts on the company, and the holders of the bonds are creditors of the company and they do not participate in its ownership, so the company or the authority gets the necessary financing without additional owners entering the company.

It is noted that the bonds deserve a fixed return regardless of the result of the company’s activity, with profit or loss, as they are considered a usurious loan that deserves interest. Therefore, it is not permissible to deal with it from the Islamic legal point of view as usury is prohibited in the Islamic economic system.

Also Read: The economic effects of usury: How economists view usury

Third: Investment Bonds (Sukuk)

Sukuk are documents of equal value that are common shares in ownership of property, services, benefits or assets of a specific project or investment activity.

Sukuk is the Sharia-compliant formula that equals bonds, and sukuk is intended when issuing official documents and financial certificates of equal value representing ownership of a common share in a property, whether this ownership is of a benefit, or a right, or a combination thereof, or an amount of money, or even debt, and this ownership is actual or in the stages of construction, issued in accordance with a legal contract and abides by the provisions of this contract.

The types of Sukuk and provisions to be adhered to vary according to the contract on which the Sukuk was issued, including Sukuk Assets, Salam Sukuk, Murabaha Sukuk and Sharing Sukuk.

Sukuk properties

1. Sukuk are of equal value affirms to the bearer the right of financial rights and obligations it represents.
2. It represents a common share in the ownership of assets designated for investment, whether notables, services, moral rights, debts or money, and does not represent debt in respect of its source.
3. Issued on the basis of a contract in Islamic law, and with legal controls governing its issuance and circulation.
4. Its trading is subject to the terms of trading what these Sukuk represent.
5. The owner of the Sukuk is entitled to the profit according to the agreement indicated in the prospectus, and he bears the loss according to the Sukuk he owns.

Also read: What Do You Know About Investment Funds?

Investment Sukuk can be considered as shares in the Islamic system, where a group of individuals participates in the establishment of a company, by offering specific shares in which each person participates according to his desire, and these Sukuk are offered for public subscription and individuals buy these Sukuk, so the Sukuk holder has a right in the working capital as well as participation in the administration, and this entails other rights, such as the right to dispose the instrument, whether by sale, giving away or inheritance, and all provisions that relate to financial transactions.

From the above, dear reader, the similarity between shares and Sukuk shows that it carries investment risks and that they do not guarantee a stable return. Their return is related to the outcome of the investment as a profit and loss. While the bond guarantees the amount of the debt in addition to the fixed return on the principal, and the bonds are considered a low-risk investment, but it involves interest that is forbidden by Islamic law.

The importance of securities goes back to the fact that they are an investment made by governmental organizations such as municipalities and by companies and commercial institutions in general, by offering securities to raise funds for a project or to provide additional capital or even to pay debts owed on them. When issuing the securities, investors buy them for a return on them, and the return varies according to the type of security. Therefore, securities of all types remain a major focus of attention from these entities, companies and investors.