Financial Securities: An Overview

Securities

• Defined in the Financial Markets Act, Act No. 19 of 2012, which governs securities services regulation in South Africa.
• Focus is on regulated financial services, particularly licensed exchanges, central securities depositories, clearing houses, and their users/members.
• Includes listed and unlisted shares, depository receipts, equities in public companies (excluding share block companies).
• Includes debentures and bonds issued by public companies, state-owned enterprises, the South African Reserve Bank, and the South African government.
• Includes derivative instruments, notes, participatory interests in collective investment schemes, and instruments based on an index.
• Also includes units in collective investment schemes licensed/registered outside the Republic and securities listed on external exchanges.
• Can include instruments similar to the above, as prescribed by the registrar.
• Includes rights in the mentioned securities, but excludes money market securities (except for Chapter IV purposes or if prescribed by the registrar).
• Excludes share capital of the South African Reserve Bank and any security prescribed by the registrar

Listed vs. Unlisted Securities

• Listed securities are traded on formal exchanges; unlisted securities are not.
• This distinction affects liquidity, transparency, and ease of trading.
• Investing in either depends on risk appetite, liquidity needs, and desired transparency/regulation.

Listed Securities

• Traded on organized and regulated stock exchanges.
• Transactions occur via the exchange's trading platform.
• Prices are determined by market forces (supply and demand).
• Exchanges provide a transparent and efficient marketplace.
• Generally more liquid due to active trading and many participants.
• Market prices are readily available and updated in real-time.
• Subject to strict regulatory requirements and disclosure standards.
• Accessible to investors through brokerage accounts.
• Examples include common stocks on the NYSE or Nasdaq and corporate bonds traded on bond exchanges.

Unlisted Securities

• Not traded on formal stock exchanges.
• Transactions occur over-the-counter (OTC), through private placements, or other informal channels.
• Prices may be negotiated between buyers and sellers.
• Lower liquidity compared to listed securities.
• Transactions can be less frequent, with fewer buyers or sellers.
• Pricing and trading information may not be readily available, and prices may be less transparent.
• Subject to regulatory oversight, but requirements may be less stringent than for listed securities.
• Trading may be restricted to institutional investors or qualified individuals.
• Less accessible to the general public.
• Examples include private equity investments and OTC stocks not listed on major exchanges.

Asset Classes

• Broad groups of securities with similar characteristics.
• Securities in an asset class tend to react similarly to market conditions.
• Usually governed by the same laws, rules, and regulations.
• Understanding asset classes helps investment managers construct diversified portfolios.

Equities (Stocks)

• Represent ownership in a company, entitling holders to a portion of assets and earnings.
• Common stocks offer voting rights and potential dividends.
• Preferred stocks often offer fixed dividends but usually lack voting rights.
• Classified by market capitalization (large-cap, mid-cap, small-cap), sector (technology, healthcare, consumer goods), and geographic location.

Fixed-Income Securities (Bonds)

• Debt instruments issued by governments, municipalities, or corporations to raise capital.
• Investors lend money to the issuer in exchange for periodic interest payments (coupon payments) and principal repayment at maturity.
• Vary in terms of issuer credit quality (investment-grade vs. high-yield), maturity (short-term, intermediate-term, long-term), and coupon structure (fixed-rate, floating-rate).

Cash Equivalents

• Highly liquid and low-risk investments easily converted into cash.
• Examples include Treasury bills (T-bills), certificates of deposit (CDs), money market funds, and commercial paper.
• Offer lower returns but provide stability and liquidity.

Real Estate

• Involves purchasing, owning, and managing properties for income generation and/or capital appreciation.
• Includes residential, commercial (office buildings, retail spaces), industrial properties (warehouses, factories), and real estate investment trusts (REITs).
• Offers diversification and long-term growth potential but includes risks like market fluctuations and management challenges.

Commodities

• Physical goods such as gold, silver, oil, agricultural products, and metals.
• Exposure can be gained through commodity futures contracts, exchange-traded funds (ETFs), and commodity-specific mutual funds.
• Offer diversification and can hedge against inflation but can be volatile and subject to supply and demand dynamics.

Alternative Investments

• Assets beyond traditional stocks, bonds, and cash.
• Include hedge funds, private equity, venture capital, real assets (infrastructure and timberland), and structured products.
• Often have low correlation with traditional assets, offering diversification, Tend to have higher fees, less liquidity, and greater complexity.