# Understanding Investment Securities: Types, Uses, and Benefits

## What Are Investment Securities?

Investment securities are tradable financial assets intended for purchase as investments by financial institutions. They include equity stakes and debt securities. Banks often hold investment securities in their portfolios, due to their liquidity and revenue potential. Article 8 of the Uniform Commercial Code (UCC) governs investment securities. The investment-grade ratings issued by credit rating agencies can help investors purchase debt issues with greater confidence.

### Key Takeaways

*   Investment securities are financial assets such as equities or fixed income instruments that banks and other institutions hold to generate revenue and provide liquidity.
*   Banks often balance their portfolios with loans and marketable securities, which contribute to their primary sources of revenue.
*   Unlike loans, which require direct negotiation, investment securities are typically acquired via third-party brokers or dealers, offering banks an avenue for liquidity and collateral.
*   Equity stakes in the form of preferred or common shares, and debt securities, including Treasury bonds, are critical components of a bank’s investment securities portfolio, provided they offer a measure of safety as investment-grade assets.
*   Money market securities, like commercial paper and negotiable certificates of deposit, offer quick conversion to cash, enhancing a financial institution's liquidity.

## A Deeper Dive into Investment Securities

Banks often buy [marketable securities](https://www.investopedia.com/terms/m/marketablesecurities.asp) for their portfolios, which, along with loans, are a main revenue source. 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).

Loans are negotiated directly between borrowers and lenders, whereas investment securities are usually acquired through a third-party broker or dealer. Investment securities at banks are subject to capital restrictions. For example, the number of Type II securities or securities issued by a state government is restricted to 10% of the bank's overall capital and surplus.

Investment securities offer banks [liquidity](https://www.investopedia.com/terms/l/liquidity.asp) and profits from realized [capital gains](https://www.investopedia.com/terms/c/capitalgain.asp) upon sale. If they are investment-grade, these investment securities are often able to help banks meet their pledge requirements for government deposits. In this instance, investment securities can be viewed as collateral.

## Exploring the Types of Investment Securities

### Equity Stakes

Banks can hold investment [securities](https://www.investopedia.com/terms/s/security.asp) as collateral in the form of [equity](https://www.investopedia.com/terms/e/equity.asp) in corporations or [debt](https://www.investopedia.com/terms/d/debt.asp) 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 initial public offering (IPO) allocations or small gap growth companies, might not be appropriate for investment securities. Some companies offer dual-class stock with different voting rights and dividends.

### Debt Securities

Debt securities can take the common forms of [secured](https://www.investopedia.com/terms/s/secureddebt.asp) or unsecured corporate debentures. (Secured corporate debentures can be backed by company assets, such as a mortgage or company equipment). In this scenario, secured debt (also called investment-grade) would be preferred. Treasury bonds or Treasury bills and [municipal bonds](https://www.investopedia.com/terms/m/municipalbond.asp) (state, county, municipal issues) are also options for a bank’s investment securities portfolio. Again, these bonds should be investment-grade.

[Derivative securities](https://www.investopedia.com/terms/d/derivative.asp), like mortgage-backed securities, are risky and usually not recommended for a bank's investment portfolio.

### Money Market Securities

Other types of investment securities can include money-market securities for quick conversion to cash. They typically include [commercial paper](https://www.investopedia.com/terms/c/commercialpaper.asp), repurchase agreements, negotiable CDs, bankers' acceptances, and federal funds.

## The Bottom Line

Investment securities are tradable financial assets held by financial institutions. The primary types of investment securities are equities and debt securities such as Treasury bonds and municipal bonds. For banks, investment securities have certain advantages, such as liquidity, profits from their sale, and their role in meeting requirements for government deposits. As opposed to loans, investment securities are usually purchased from broker-dealers or other intermediaries. They are governed by Article 8 of the UCC.