Securities are the financial instruments that represent a form of ownership or stake in a company. Securities allow individuals to own asset(s) without taking possession of them. Because of this, securities can be exchanged easily. In addition to this, pricing securities is not difficult which is why they are a strong indicator of the value of the asset. In order to purchase or sell securities, a trader must obtain a license to ensure they have been trained to follow a set of laws established by the SEC (Securities and Exchange Commission). Despite the regulatory agencies and laws in effect, fraud is still widespread. Fraud is an “umbrella term” that encompasses a wide range of deceptive and manipulative practices utilized by perpetrators to profit at the expense of the investor(s).
Types of securities:
Bonds, which can be issued by corporations or the government (Federal/Local).
A corporate bond is essentially a loan to a corporate entity in which you receive interest annually until the loan is paid off. Corporate bonds offer stability and are considered safer than stock in a company. Bondholders do not get dividends or voting rights which is why in the long haul, stocks have the potential for larger returns.
A bond issued by the federal government is very low in terms of risk and most frequently issued by the US Treasury. The potential for return is significantly lower than stocks or bonds issued by corporate entities.
A municipal bond is issued by state and local government. These include a city, county, town or school district. Typically,the rate of interest is lower than that of a bond issued by a corporation.
Mutual Funds , which are composed of a variety of securities.
A mutual fund can be stock options, bonds or both. In most cases, the investment is placed in a pool with monies from other investors. The fund is managed by an investment company, who selects the securities. The risk of the investment is reduced due to the diversity of the portfolio.
The right to purchase or sell stock in a company, at a specific rate for a window of time. The right to purchase stock is referred to as a call, the right to sell is called a “put”.
A futures contract is an agreement to sell a certain security in the future for a pre-determined rate. An option is the right to purchase or sell a contract at a certain price for a specified period of time. Since it used to reduce risk, a futures option is utilized by many investors.
History of Regulation
The regulation of Securities in the United States dates back to the 1930’s when the New Deal was passed. In the1930’s & 40’s, five major laws were put into place by the Federal Government.
- Securities Act of 1933 a regulation on the distribution of new securities
- Securities Exchange Act of 1934- regulation of trading securities , brokers & exchanges
- Trust Indenture Act of 1939- regulation of debt securities
- Investment Company Act of 1940- regulating mutual funds
- Investment Advisers Act of 1940- regulation of investment advisers
Since the 1940’s a number of amendments have been made to these regulations in order to promote fair trade and enforce illegitimate/illegal practices. These major laws also serve to protect investors, ensuring they are adequately informed at the time of purchase.
While many measures are in place to reduce risk, it is still inherent, especially when dealing with non-governmental entities. Educating yourself on the common practices of Fraudsters can help you identify red flags when it comes time to invest your hard earned money. While often, fraudsters target vulnerable investors, saavy, educated people are still victimized.
Florida Based Law Firm Hanley Law have represented thousands of clients nationwide and represent individual investors in claims for securities and stockbroker misconduct. If you’ve suffered monetary loss due to misconduct or believe your investment was mishandled, contact us for a Free Case Evaluation.