What Are Investment Securities?
Investment securities are tradable financial assets such as equities or fixed income instruments that are acquired with the intention of holding them for investment. Different from securities acquired for quick resale by broker-dealers or intermediaries, investment securities are held for a longer period and play a significant role in an investor’s portfolio.
Investment securities are governed by Article 8 of the Uniform Commercial Code (UCC).
Key Takeaways
- Definition: Investment securities are financial assets like equities or fixed income instruments held for investment purposes.
- Bank Portfolios: Banks purchase marketable securities as one of their main revenue sources, alongside loans.
- Collateral Role: Investment securities held by banks as collateral can be both equity stakes and debt securities.
Understanding Investment Securities
Banks often hold marketable securities in their portfolios as one of their main revenue sources. These assets are typically reflected on the balance sheet at amortized book value, defined as the initial cost less amortization. The primary difference between loans and investment securities is that loans are typically negotiated directly between the borrower and lender, whereas investment securities are commonly bought via a broker or dealer.
Investment securities offer banks liquidity and the potential for capital gains upon sale. Moreover, if they are investment-grade, these securities can help banks meet their pledge requirements for government deposits, serving as collateral.
Types of Investment Securities
Equity Stakes
Investment securities can include equity stakes (ownership stakes) in corporations, such as preferred or common shares. These stakes must provide a degree of safety, excluding high-risk options like IPO allocations or shares in small-cap growth companies. Certain companies offer dual-class stock, allowing different classes of shares to have distinct voting rights and dividend payments.
Debt Securities
Debt securities may consist of secured or unsecured corporate debentures. Secured debt is backed by company assets like mortgages or equipment and is generally preferred. Examples include Treasury bonds, Treasury bills, and municipal bonds. These should strictly be of investment-grade quality.
While securities in general may include derivative securities like mortgage-backed securities, which carry higher risks, these are usually not recommended for banks’ investment securities portfolios.
Money Market Securities
Other types of investment securities include money-market securities that can be quickly converted to cash. These include commercial paper, repurchase agreements, negotiable certificates of deposit (CDs), bankers’ acceptances, and federal funds.
Related Terms: marketable securities, capital gains, equities, debt securities, money market, liquidity.
