What are securities? Characteristics and classification of securities

1. What is the concept of securities?

In the market economy, capital is circulated through two main channels, including direct capital mobilization (through the stock market) and indirect capital mobilization (through capital mobilization activities and credit provision of intermediary financial institutions such as banks). In the direct capital mobilization channel, which is specifically represented by the stock market, idle capital is directly transferred by investors to those who need capital such as companies or the government and local authorities for business purposes or to satisfy the state’s spending needs. In return, investors own valuable documents (called securities – securities prices), issued by companies or the government and local authorities in accordance with the law to record the property rights (including ownership or creditor rights) of investors over the issuing organization.

In general, securities are understood as legal instruments issued by an organization in accordance with the law to record the property rights and legitimate benefits of investors – the owners of securities with respect to the issuing organization. In other words, securities reflect the legal relationship between the investor – the owner of the securities and the issuing organization that issues those securities. Depending on the type of securities that investors own, whether they are equity securities or debt securities, this relationship can exist in the form of a capital contribution relationship or a lending relationship. If investors own equity securities such as stocks, their legal status will be the owner of the issuing organization’s securities. If investors own debt securities such as corporate bonds and government bonds, their legal status will be the creditor of the issuing organization’s securities.

Based on Article 4, Clause 1 of the Securities Law 2019, securities are assets, including the following types of securities:

• Stocks, bonds, fund certificates;
• Warrants, secured warrants, stock purchase rights, depositary receipts;
• Derivatives;
• Other types of securities as prescribed by the Government.

2. Characteristics of securities

As a commodity in the market economy, securities have the following basic characteristics:

2.1. Securities are legal instruments that record the legitimate rights and interests of investors with respect to the issuing organization

This is the characteristic to distinguish securities from other common commodities such as materials, raw materials, machinery and equipment, consumer goods… Although it is essentially a legal tool, securities are also a type of valuable paper, which records a specific amount of money that the securities owner can legally own and is protected by law. This feature makes securities significantly different from other legal documents, such as a will or a document proving ownership of a house.

2.2. Securities are tradable, meaning they can be exchanged, bought, sold, gifted, inherited, or pledged for asset obligations

This characteristic makes securities a tangible commodity, and furthermore, a special commodity, because it can only circulate on a special market – called the stock market.

2.3. Securities have high liquidity, meaning they can be easily converted into cash

This feature originates from the commodity attributes – means of circulation, means of storage, and means of profit generation of securities. Because securities themselves have all these attributes of commodities, securities have very high liquidity. Securities owners can easily convert securities into cash by selling them on the secondary stock market, through transactions with securities brokers.

2.4. Securities are assets with high risk for owners

This is because, in reality, the true value of securities does not depend on the securities themselves but mainly on the quality of the operations and financial statements of the issuing organization. Sometimes, the price of securities also depends heavily on the degree of market transparency and the psychological attitude of investors, as well as the ability of market managers to manage the market. Due to the high risk of securities, investing in securities is always warned by managers as a risky investment category, despite its attractiveness and the promise of high returns for investors.

3. Stock classification

In reality, there are many different types of securities that exist and are currently traded on the market. Depending on the classification criteria, securities can be divided into different types.

3.1. Based on the physical form of securities

If based on the physical form of securities, they can be classified into securities certificates, securities ledger entries, or electronic securities.

Securities certificates are certificates issued by organizations in the form of capital contribution certificates or debt certificates, which clearly state the capital contribution or lending capital of investors to the issuing organization, along with recording the legal rights and interests of investors such as the right to receive dividends, bonuses, transfer rights, and the right to vote on important issues of the company…

Securities ledger entries are securities issued in the form of numbers recorded and stored in the securities issuance. With this type of security, investors do not directly hold securities but are only notified by the issuing organization about the total number and type of securities they own, the legal rights and interests that the securities owner enjoys and is protected by law. All information about securities and securities owners is reflected in the securities issuance, which is directly held and placed under the direct control of the State Securities Commission.

Electronic securities are securities issued in the form of electronic data, which record the amount of capital contributed or lent by investors to the issuing organization, along with recording the legal rights and interests of investors with respect to the issuing organization. In principle, there is no difference in legal value between electronic securities and securities certificates and securities ledger entries. However, due to the existing form of electronic securities being electronic data, the storage, preservation, security, and certification are quite complex and require the support of information technology service providers.

3.2. Based on the legal nature of securities

If based on the legal nature of securities, securities can be classified into types such as stocks, bonds, fund certificates, warrants, secured warrants, share purchase rights, ledger certificates, or derivative securities.

Stocks are securities that confirm the legal rights and interests of the owner with respect to a portion of the capital stock of the issuing organization. (Article 4, Clause 2 of the 2019 Securities Law)

Shares (Share, Stock) are capital securities issued by a joint-stock company to record the ownership rights of investors as shareholders of the company, according to the proportion of capital contributed to the company. Each share confirms the number of shares held by the shareholder in the joint-stock company, and corresponds to that number of shares is the right to receive dividends, the right to participate in the management of the company, and the obligation to share risks in business with the company. According to the current legal regulations, shares include types such as: common shares (Common Stock, Ordinary Share); preferred shares (Preference Share) including preferred voting shares, preferred dividend shares, preferred redemption shares, and other preferred shares.

Bonds are securities that confirm the legal rights and interests of the owner with respect to a portion of the debt of the issuing organization. (Article 4, Clause 3 of the 2019 Securities Law)

Bonds are debt securities issued by an organization (company or government and local authorities) to record the creditor’s rights of investors with respect to the issuing organization. Each bond records the right to receive fixed interest and the right to claim debt of the investor with respect to the issuing organization when the bond matures. Bondholders receive a fixed interest rate, which is independent of the operating results of the issuing organization and therefore do not have the right to participate in the internal affairs of the issuing organization. Bonds include types such as corporate bonds and government bonds, where bonds issued by the government are usually considered safer for investors. In reality, to make corporate bonds more attractive when raising capital from investors, joint-stock companies sometimes issue a type of bond that can be converted into common shares, called convertible bonds. These bonds allow their owners to convert them into common shares of the joint-stock company when necessary at a predetermined price, called the conversion price.

Fund certificates are securities that confirm the ownership rights of investors with respect to a portion of the capital contribution of the securities investment fund. (Article 4, Clause 4 of the 2019 Securities Law)

Fund certificates are a type of capital security issued by a fund management company to investors who own them when establishing a securities investment fund. Each fund certificate confirms the investor’s capital contribution in the securities investment fund and the right to receive returns based on the investment results of the securities investment fund. Fund certificates have some characteristics similar to stocks, as they are also capital securities, but differ from stocks in that fund certificate owners do not directly participate in the management and operation of the fund. Instead, they delegate collectively to the fund management company to perform this work, based on a fund management service contract signed between investors and the fund management company.

Warrants are securities issued along with the issuance of bonds or preferred shares, allowing the warrant holder to purchase a certain number of common shares at a predetermined price within a specified period. (Article 4, Clause 5 of the 2019 Securities Law)

Secured warrants are securities with collateral issued by a securities company that allow the owner to buy (call warrants) or sell (put warrants) underlying securities with the issuing organization of the secured warrants at a predetermined price at a certain time or before a predetermined time, or receive the difference between the exercise price and the underlying security price at the time of exercise. (Article 6, Clause 4 of the 2019 Securities Law)

Share purchase rights are securities issued by a joint-stock company to give existing shareholders the right to purchase new shares under predetermined conditions. (Article 7, Clause 4 of the 2019 Securities Law)

Ledger certificates are securities issued on the basis of securities of an organization established and operating legally in Vietnam. (Article 8, Clause 4 of the 2019 Securities Law)