Question

write an essay to Evaluate the effect of the different classes of securities on the content of financial reports

Answer 1

Securities are broadly categorized into:

1. Debt securities

2. Equity securities

3. Derivatives

Security means any note, stock, treasury stock, bond, debenture, certificate of interest or participation in any profit sharing agreement.

1. Debt securities:

Debt securities and fixed-income investments, bonds are basically investments in public or private debt.

When investing in debt securities, the investor is essentially purchasing a debt security, issued by a government or business, who then uses the money invested for their own, legal purposes.

In return, the bond investor received periodic security repayments, at a fixed rate, and over a specific period of time. A bond investor will receive the money he loaned to the bond issuer, plus interest, until the bond meets its obligated maturity "due" date.

Bonds are deemed less risky than stocks, as governments and companies that issue bonds are more stable and secure than. That doesn't mean bonds have no risk - they do. Companies may default, and there's always the risk that bond interest rate returns may not keep up with the rate of inflation.

Effect on the contents of financial reports:

Debt securities are fixed income earning securities for the investor. Debt securities will generate fixed income irrespective of the volatility in the stock market. Thus, debt securities include, bank notes, bonds and debentures, these are issued by government, private and public companies.

In hands Investor of debt securities: Investment made in the debt securities will be shown at face value in the assets side of the balance sheet. regular income generated by these debt securities will be credited to income statement.

In hands issuer of debt securities: Debt securities issued will be shown at face value in the liabilities side of the balance sheet. Interest payable will be debited to income statement.

2. Equity securities:

Common stock is a security that represents ownership in a corporation. Holders of common stock exercise control by electing a board of directors and voting on corporate policy. Preferred stock gives no voting rights to shareholders while common stock does. Preferred stockholders are entitled to repayment on priority on liquidation of the corporation. Common stock can be issued by the listed companies.

Stocks should be considered an important part of any investor’s portfolio. They bear a greater amount of risk when compared to preferred stock and bonds. However, with the greater risk comes the greater potential for reward. Over the long term, stocks tend to outperform other investments but are more exposed to volatility over the short term.

In hands Investor of common stock: Investment made in the common stock will be shown in the assets side of the balance sheet. common stock holders are entitled to dividends. Dividends received will be credited to income statement.

In hands issuer of common stock: Common stock issued will be shown in the liabilities side of the balance sheet. Dividend payable will be debited to income statement.

3. Derivatives and options:

Options are derivatives that are often used by traders and investment professionals to manage or reduce their risk. Understanding options and other derivatives can enhance a trader's profitability.

A derivative is a contract between two or more parties whose value is based on an agreed-upon underlying financial asset. Common underlying instruments include bonds, commodities, currencies, interest rates, market indexes, and stocks.

There are two classes of derivative products - "lock" and "option":

Lock products bind the respective parties from the outset to the agreed-upon terms over the life of the contract (e.g. swaps, futures, or forwards).

The risk-reward equation is often thought to be the basis for investment philosophy and derivatives can be used to either mitigate risk (hedging) or assume risk with the expectation of commensurate reward (speculation).