What are Investment Securities
Investment securities are securities (tradable financial assets, such as equities or fixed income instruments) that are purchased in order to be held for investment. This is in contrast to securities, which are purchased by a broker-dealer or other intermediary, for quick resale (i.e. trading account securities).
Investment Securities are subject to governance via Article 8 of the Uniform Commercial Code (UCC).
BREAKING DOWN Investment Securities
Investment securities can be found on the balance sheet assets of many banks, carried at amortized book value (defined as the original cost less amortization until the present date). Banks often purchase marketable securities to hold in their portfolios; these are usually one of two main sources of revenue, along with loans.
Investment securities provide banks with the advantage of liquidity in addition to the profits from realized capital gains when these are sold. If they are investment-grade, these investment securities are often able to help banks meet their pledge requirements for government deposits. In this instance, they can be viewed as collateral.
Types of Investment Securities
As with all securities, investment securities held by banks as collateral can take the form of equity (ownership stakes) in corporations or debt securities. Equity stakes can be in the form of preferred or common shares although it is critical that they provide a measure of safety in this case. High risk, high reward securities, such as IPO allocations or small gap growth companies might not be appropriate for investment securities. Some companies offer dual class stock, which differ based on distinct voting rights and dividend payments.
Debt securities can take the common forms of secured or unsecured corporate debentures (secured can be backed by company assets, such as a mortgage or company equipment). In this scenario, secured debt (investment-grade) would be preferred. Treasury bonds or T-bills and municipal bonds (state, county, municipal issues) are also options for a bank’s investment securities portfolio. Again, these bonds should be investment-grade.
While securities in general include derivative securities (such as mortgage-backed securities, whose value is derived from the asset(s) underlying the financial instrument), these are higher risk and not often encouraged to be part of a bank’s investment securities portfolio.
Other types of investment securities can include money-market securities for quick conversion to cash. These generally take the form of commercial paper (unsecured, short-term corporate debt, maturing in 270 days or less), repurchase agreements, negotiable certificates of deposit (CDs), bankers' acceptances, and/or federal funds.