What Are Investment Securities?
Let me explain what investment securities are. They represent a category of securities—tradable financial assets like equities or fixed income instruments—that you purchase with the intention of holding them for investment. This is different from general securities, which a broker-dealer or other intermediary might buy for quick resale.
Article 8 of the Uniform Commercial Code (UCC) is what governs these investment securities.
Key Takeaways
- Investment securities are financial assets such as equities or fixed income instruments that banks and other institutions hold to generate revenue and provide liquidity.
- Banks often balance their portfolios with loans and marketable securities, which contribute to their primary sources of revenue.
- Unlike loans, which require direct negotiation, investment securities are typically acquired via third-party brokers or dealers, offering banks an avenue for liquidity and collateral.
- Equity stakes in the form of preferred or common shares, and debt securities, including Treasury bonds, are critical components of a bank’s investment securities portfolio, provided they offer a measure of safety as investment-grade assets.
- Money market securities, like commercial paper and negotiable certificates of deposit, offer quick conversion to cash, enhancing a financial institution's liquidity.
A Deeper Dive into Investment Securities
Banks frequently buy marketable securities for their portfolios, and along with loans, these serve as a main revenue source. You'll find investment securities listed on the balance sheet assets of many banks, carried at amortized book value—which is the original cost less amortization up to the present date.
Loans get negotiated directly between borrowers and lenders, but investment securities are usually acquired through a third-party broker or dealer. Keep in mind that investment securities at banks are subject to capital restrictions. For instance, the number of Type II securities or those issued by a state government is limited to 10% of the bank's overall capital and surplus.
These investment securities provide banks with liquidity and profits from realized capital gains when sold. If they are investment-grade, they can help banks meet pledge requirements for government deposits—in that case, you can view them as collateral.
Exploring the Types of Investment Securities
Equity Stakes
Banks can hold investment securities as collateral in the form of equity in corporations or debt securities. Equity stakes might come as preferred or common shares, but it's critical that they provide a measure of safety. High-risk, high-reward options like initial public offering (IPO) allocations or small-cap growth companies aren't appropriate for investment securities. Some companies offer dual-class stock with different voting rights and dividends.
Debt Securities
Debt securities can take the form of secured or unsecured corporate debentures. Secured ones might be backed by company assets, such as a mortgage or equipment. In this context, secured debt, also called investment-grade, is preferred. Treasury bonds or bills and municipal bonds from states, counties, or municipalities are also options for a bank’s investment securities portfolio. These should be investment-grade as well.
Derivative securities, like mortgage-backed securities, are risky and usually not recommended for a bank's investment portfolio.
Money Market Securities
Other types of investment securities include money-market securities for quick conversion to cash. They typically encompass commercial paper, repurchase agreements, negotiable CDs, bankers' acceptances, and federal funds.
Other articles for you
ACATS is an automated system that streamlines the transfer of securities between brokerage accounts.
A zone of support is a price area where a security's value is predicted to stop declining and potentially reverse or continue its trend.
Trade signals are analytical triggers that guide buying or selling securities based on various market criteria.
A variance swap is a financial derivative for hedging or speculating on an asset's price variance.
This text explains the role, rights, responsibilities, and types of shareholders in a corporation.
Current liabilities are a company's short-term financial obligations due within one year or a normal operating cycle, settled using current assets.
An occurrence policy provides insurance coverage for claims arising from events that happened during the policy period, regardless of when the claim is filed.
Dollar duration, or DV01, measures a bond's value change in dollars for a 100 basis point interest rate shift, aiding in assessing interest rate risk.
The law of supply and demand explains how price changes influence the supply and demand of goods, leading to market equilibrium.
The Rule of 78 is a loan interest method that front-loads payments to benefit lenders, especially if borrowers pay off early.