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Selam Teshome, MBA, MA 
Selam Teshome, MBA, MA
Managing Director at Cornerstone Advisory Sevices
Published Feb 20, 2023
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Capital market securities are financial instruments that are issued by corporations and governments to raise capital. These securities can be in the form of debt securities, equity securities, and derivatives. Capital market securities give investors the opportunity to build wealth over time by investing in diversified assets and earning returns on those investments.
Debt securities are like loans that provide the holder with a predetermined stream of payments over a certain period. They can be short-term or long-term and are generally issued by governments and corporations to fund projects or operations. Common types of debt securities include government bonds, corporate bonds, and asset-backed securities. Debt security holders are paid back before equity holders in case of market downturns or bankruptcies. When investing in debt securities, investors need to consider various factors, such as credit ratings, yield spreads, and duration.
Equity securities represent ownership in a company. Equity security holders are called shareholders and have the right to vote on certain matters and decisions regarding how the company is run, receive dividends from profits, and share in any capital gains if the value of their shares increases. Common stock and preferred stock are two types of equity securities. Common stockholders are able to vote and receive dividends, while preferred stockholders have priority over common shareholders if the company were to liquidate or go bankrupt.
Derivative securities derive their value from an underlying asset, such as a stock, bond, commodity, or currency. They are used by investors to hedge against risk and speculate on the direction of price movements in markets. Options, futures, forwards, and swaps are different types of derivative securities. Options give the holder the right, but not the obligation, to buy or sell an underlying asset at a set price before an expiration date. Futures oblige parties to buy or sell a certain asset at a pre-determined price on a specified date in the future. Forwards contracts have more flexible terms than standard futures, including customizable delivery dates, settlement methods, and payment schedules. Swaps are contracts between two parties to exchange one financial asset or obligation for another.
Overall, capital market securities offer investors a variety of opportunities to diversify and grow their portfolios. Debt securities provide investors with steady income while also providing some protection from volatility. Equity investments come with potentially higher returns compared to debt securities and are ideal for those looking for exposure to high-growth industries. Derivatives offer numerous benefits in terms of hedging risk and providing access to certain asset classes otherwise unattainable through traditional investment methods alone. It is important for individual investors to carefully consider all options before making any decisions so they can select the best instruments suited towards meeting their long-term financial goals.
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