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Definitions of Financial Terms

What is a security?
Securities are a type of transferable interests representing financial value. Traditionally securities have been categorized between debt and equity securities, and between bearer and registered securities.

Debt Security

Debt securities are the legal obligation owed by an issuer to an investor when an issuer borrows money from the investor. The debt security outlines the terms of this obligation including: the amount the issuer borrowed, the interest rate and frequency of interest payments to be made to the investor, and the time at which the
security will mature or may be called. If a company goes bankrupt, debt security holders generally may make claims against the company's assets before equity holders.Debt securities include Bonds, Local Registered Stocks (LRS’s), Certificate of Deposits (CD’s), Commercial Papers, REPO’s and Treasury Bills.

Equity Security
Equity securities stock represent direct ownership in the issuing company. Common shares, preferred shares, and convertible securities are all equity securities. A person that owns $1000 worth of XYZ stock owns $1000 worth of company XYZ. Equity, however, is subordinate to debt. If a company goes bankrupt the holders of debt securities generally have claims senior to the equity owners.

Sovereign Security
Debt securities issued and guaranteed by a government. Sovereign securities which include Debentures, Treasury bills and Sovereign bonds can be issued in the domestic or foreign market.

Corporate Security
Corporate securities are short and long term debt issued by companies. Short term debt is issued as commercial paper. Long term debt is issued as bonds/notes. Issuers place paper in their own domestic market or they may widen their investor base by issuing in the international market in any number of currencies.

Liquidity refers to how easily securities can be bought or sold in the market. A security is liquid when it possesses the ability to be quickly bought or sold at a particular time without causing a significant movement in the price. Liquidity is one of the most important characteristics of a good market. Securities possess different levels of liquidity depending on how easily they can be converted into cash. Sovereign securities are more liquid than corporate issues as a larger market exists for the purchase and sale of government instruments as opposed to corporate instruments. In general, liquidity is also affected by the settlement period. The longer the settlement period the less liquid the security will be and vice versa. International standards favours a settlement period of T+3, this means that sales of securities would be settled in three days time from trade date. In Jamaica the acceptable settlement period is T+1 for individuals and T+2 for broker to broker transactions.

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