Debt is a promise to repay a certain amount of money. In general, securities are defined in the financial world as financial instruments that are fungible (divisible) with a changing monetary value.
The most common types of securities include equity and debt and here we will talk about debt in more detail.
How do debt securities work?
The idea behind debt is to raise money for the issuer. Usually, companies or governments issue these debt securities. Government securities in the US are called Treasurys, while companies usually issue their debt in the form of corporate bonds.
As a bondholder, you can expect regular income from interest payments and the repayment of the principal upon maturity.
Most often, bonds offer fixed-income investments. This is in stark contrast to equities, where nothing is fixed, even the dividend may be cut if the company chooses so.
This is not to say there are no risks involved in debt securities. Inflation running high, interest rates rising (while your interest payments are fixed), credit risk (the possibility that the issuer may default on its debt obligation) all pose a risk.
A bond can be re-sold and traded among other investors in the secondary market. As a retail investor, typically you’ll buy and sell a bond in the secondary market (i.e. after it has been issued) through a broker - this is true for both government and corporate bonds.
For a more comprehensive overview of government bonds, municipal bonds and corporate bonds and the risk associated with them, check out our educational article on bonds.