What are the two main types of securities?

The classification of securities into two main types—debt and equity securities—is fundamental in understanding financial markets.

Debt securities represent borrowed funds that must be repaid, typically with interest. They include instruments such as bonds and notes, where issuers borrow money from investors and agree to pay back the principal amount at a specified time, along with periodic interest payments. This category is characterized by the lender-borrower relationship, creating a fixed obligation for the issuer.

Equity securities, on the other hand, represent ownership interests in a company. When investors purchase equity securities, such as stocks, they buy a share of the company’s assets and profits. This type of security carries greater risk compared to debt securities, as stockholders have residual claims on assets after debt obligations are met. Moreover, equity investors may benefit from capital appreciation and dividends, which depend on the company's performance.

Understanding this distinction is crucial because it informs investors about the nature of their investment, the risk-return profile, and their rights as stakeholders in a company or creditor in the case of debt. This fundamental knowledge provides a framework for making informed decisions in financial markets.