Securities trading is the process of transferring ownership of securities before their maturity date, due to buying and selling among different investors in the secondary markets.
Benefits
Trading in securities is a more profitable investment alternative compared to traditional forms, by managing the risk of the (non-)return rate through portfolio diversification, depending on the investor's own approach to risk.
Investing in securities brings investors benefits such as:
- Profit from Invested Capital
- Profit from Dividends
- Profit from Bond Interest
- Ownership in Listed Companies, etc.
Financial Instruments
Financial Instruments are divided into 3 main classes:
- Fixed Income Securities
- These are mainly debt instruments and provide periodic or fixed cash flows for a specified period of time (Treasury Bills, Treasury Bonds, Commercial Paper, Corporate Bonds, Municipal Bonds).
- Equity Instruments
- Represent ownership over the assets of the legal entity (Common Shares, Preferred Shares, Pre-emptive Rights, etc.).
- Financial Derivatives
- These are contracts whose price derives from the prices of another asset (Forward, Futures, Options, Swaps).
For more detailed information about Financial Instruments, click here.
Risks
Investors trading securities on the exchange face the risk of losing the value of their securities, due to factors that may arise from economic, political changes, etc. These risks include:
- Capital Risk
- Relates to investments in stocks. Investments in stocks carry the risk of a decline in their price.
- Interest Rate Risk
- Relates to investments in debt securities. These investments carry the risk of changes in interest rates, since if rates rise, the value (price) of bonds falls.
- Currency Risk
- Relates to investment in foreign currencies. Investments in foreign currency carry the risk of exchange rate volatility; a sudden devaluation can make the profit from this investment practically zero.
- Inflation Risk
- Relates to the loss of purchasing power due to the rise in the price level in the economy. Over time, the same amount of money will buy fewer goods and services.
Portfolio Management
Portfolio management means the professional management of securities or other assets by institutions specialized in this field, based on investors' approach to risk (how much they want it or how much they avoid it).
Portfolio management includes a range of specialized services, whose function is to manage the securities of individuals or companies, such as: stocks, bonds, or other assets such as real estate.