Security

Security, term in economics and finance with two meanings: something given by a borrower to a lender to secure a loan, that is, something that the lender will be able to sell and recover monies owed if the borrower defaults on repaying the loan; or a share in the equity (the assets minus the liabilities) of a business.

Securities were originally the documents that proved ownership on property or rights to income that could be used as collateral (security) for a loan. Today, the term securities is generally taken to refer to interest-bearing shares or bonds traded on the capital (long-term finance) or money (short-term finance) markets.

The past two decades have seen substantial growth in securitization, as companies have increasingly opted to raise finance through the securities market rather than through a loan from a bank or other financial intermediary. As a result the securities market has become remarkably diverse and sophisticated. Banks may have lost some of their traditional loan business, but they welcome the fact that the risk of lending is now spread among a wider range of suppliers of funds, and they now make money from arranging the issue of securities.

As securitization has grown, so too has the market for what are called derivatives. These are effectively assets derived from other assets; for example, an option (the derived asset) to buy a share (the original asset) at a certain price at any time up to a specific date in the future. In this instance, two markets operate: one for the original asset and one for the derived asset. Those who trade in options are in effect betting on the price of the share of which they have purchased an option to buy; if the share price goes up by more than the cost of the option, they can realize a profit. In theory there could be derivatives of derivatives, such as an option to buy an option to buy a share. In practice, there are real worries that too much concentration on derivatives undermines the market for the original securities.