All about securities – debt, equity and derivative contracts

Sometimes it’s difficult to know which part of the law applies to your case, especially when you’re dealing with what an outsider might see as a complicated financial dispute. If you own North Carolina securities, where do you seek help? Rest assured there are business and finance lawyers who can advise you on any securities you may hold. But until you’ve engaged the services of a local attorney, let’s familiarize ourselves with securities law terminology so you’re ready for your first appointment.

What are securities?

A security is a fungible, tradable instrument that represents financial value. Most securities are represented either by a certificate or, more commonly, only in electronic form (uncertified). As with the rest of the country, North Carolina’s securities certificates will be either “bearer” or “tab.” A bearer certificate is a certificate that grants rights to the holder simply by holding the security. A registered certificate entitles the holder to rights only if his name appears in a securities register maintained by the issuer or an intermediary commissioned by the issuer.

Securities include shares in corporate stocks or mutual funds, corporate or government issued bonds, stock options or other options, shares in limited partnerships, and various other formal investment vehicles. Securities may be issued in North Carolina by commercial corporations, governmental agencies, local authorities, and international and supranational organizations (such as the World Bank). The primary objective of purchasing securities is investment with the ultimate goal of generating income or capital gains; (Capital gain is the difference between a lower purchase price and a higher sales price).

Stocks are roughly divided into three categories.

1. Debentures:

These include debentures, bonds, deposits, debentures and commercial paper (in certain circumstances). If you hold any of these debt securities, your North Carolina securities attorney will advise that you are normally entitled to payment of principal and interest on them. There may also be contractual rights which a good lawyer will explain to you, including the right to know.

Debt securities are typically fixed-term securities that are redeemable at maturity. They may be secured or unsecured or protected by collateral. Debt securities can offer investors some control when the company is a start-up or an established company undergoing a “reorganization”. In these cases, if interest is not paid, creditors can take control of the company and liquidate it to recover part of their investment. People prefer to buy debt because of the typically higher yield than bank deposits. However, debt securities (bonds) issued by a government typically carry a lower interest rate than securities issued by commercial corporations. This applies nationally and to North Carolina securities.

2. Equity securities:

Common stock is the most popular form of stock. Investors are called shareholders and own a portion of the equity of a company, trust or partnership. It’s like saying that someone who invests in stocks is buying a tiny chunk of a company (or a big chunk, depending on your budget!). As an investor, you are not necessarily entitled to a payment like periodic interest on a bond. If a company goes bankrupt it is possible that you could lose your entire investment as the shareholders are the last to be paid out. In that case, it may be a good time to consult your North Carolina securities attorney.

On the plus side, investing in stocks can give a shareholder access to profits and capital gains that debt securities don’t. The holder of debt instruments receives only interest and payments of principal, regardless of the issuer’s financial standing. Equity investing can also provide control over the issuer’s business.

3. Derivative Contracts:

If you have invested in forwards, futures, options and/or swaps, you have probably bought a derivative. A derivative may obviously be derived from another asset, index, event, value or condition (known as the underlying asset). Instead of trading or exchanging the underlying asset, derivatives traders enter into agreements to exchange cash or assets over time based on the underlying asset. A simple example is a futures contract: an agreement to exchange the underlying asset at a future date.

A lawyer can give you more information about securities

Please note that this is not an exhaustive list of legitimate forms of securities. If you’ve bought something that you think is some form of security but isn’t covered in the information here, don’t panic! However, for your own safety, consult a securities attorney if you think you may have been the victim of securities fraud, if you have been accused of securities fraud or a related criminal offense, or if you simply have a legal question about buying or selling securities.