A big part of investing in stocks, crypto, or even real estates is understanding how investments (commonly referred to as securities) function in America.
So, before you throw your hard earned money at the “next best thing since sliced bread” investment, take a few minutes to learn the basics about how securities work in the United States.
What is considered a security?
Broadly speaking, a security is any financial asset that has the potential to generate future income. This can include stocks, bonds, real estate, and even cryptocurrencies.
The key thing to remember here is that securities are generally intended to provide investors with a stream of income, either through dividends or interest payments.
Why are securities regulated?
Securities are heavily regulated in the United States because they can be used to perpetrate scams and frauds. For example, a fraudulent company might try to sell unregistered securities to unsuspecting investors.
In addition, securities can be quite volatile and thus pose a significant risk to investors. For this reason, the government has put in place a number of regulations to help protect investors and ensure that the securities market functions efficiently.
How are securities regulated in America?
The regulation of securities in America is handled by two agencies: the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA).
The SEC is responsible for enforcing federal securities laws, while FINRA is a self-regulatory organization that oversees the securities industry. Both organizations are responsible for ensuring that investors are treated fairly and that the markets function efficiently.
What are some common types of securities?
There are many different types of securities, but some of the most common include:
· Stocks: A stock is a security that represents ownership in a company. When you buy a stock, you become a shareholder in the company and are entitled to vote on matters such as the election of directors.
· Bonds: A bond is a debt security that pays periodic interest payments to investors. When you purchase a bond, you are lending money to the issuer of the bond.
· Mutual Funds: A mutual fund is a collection of securities that are managed by a professional investment manager. When you buy shares in a mutual fund, you become a part of the collective investment and share in the profits and losses of the fund.
· ETFs: ETFs are exchange-traded funds, which are a type of mutual fund that can be traded on an exchange like a stock. ETFs are a popular investment because they offer investors exposure to a wide range of assets, including stocks, bonds, and commodities.
· Real Estate: Real estate is a physical asset that can be used as security for a loan. When you purchase real estate, you become the owner of the property and can rent it out or sell it for a profit.
· Cryptocurrencies: Cryptocurrencies are digital tokens that use cryptography to secure their transactions. Bitcoin, the most well-known cryptocurrency, is a digital asset that can be used to purchase goods and services.
How do I invest in securities?
The easiest way to invest in securities is to buy shares through a broker. Brokers are financial professionals who help you buy and sell securities.
There are many different types of brokers, but all of them charge a commission for their services. You can find a list of regulated brokers here: https://www.finra.org/investors/find-a-broker.
Alternatively, you can invest in securities through a mutual fund or ETF. These investment vehicles allow you to pool your money with other investors and spread your risk across a variety of assets.
Finally, you can also invest in real estate by buying a property or lending money to a real estate developer. However, this option is not as readily available to individual investors as the others.
What are some risks associated with investing in securities?
Securities can be quite volatile and thus pose a significant risk to investors. For example, a stock might fall in value if the company experiences problems or goes bankrupt.
In addition, securities can be used to perpetrate scams and frauds. For this reason, it is important to only invest in securities through regulated brokers and to do your own research before investing.
How can I protect myself from scams and fraud?
There are a few things you can do to protect yourself from scams and fraud:
· Only invest in securities through regulated brokers.
· Do your own research before investing.
· Beware of unsolicited offers.
· Be suspicious of high returns or promises of quick profits.
If you find yourself a victim of investment fraud, there are some actions that can be taken by hiring an experienced FINRA lawyer. Investing in the securities market can be a great way to grow your money, but it is important to understand the risks involved.
When Should I Start?
No one can truly tell you that you are ready to start investing. That is a personal decision that you will have to make for yourself. What we can tell you, however, is that the earlier you start, the more time you will have to grow your money.
And, remember, you don’t have to go it alone. There are many different types of investment vehicles available, including mutual funds and ETFs, that allow you to pool your money with other investors.