Securities

What is a security?

Short answer:

A ‘security’ is anything that can be considered and investment contract.

That means, if there’s an investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others - it's a security.

For example:

When you buy Apple stock, there’s an investment of money (~$183 at the time of writing) in a common enterprise (Apple Inc.) with a reasonable expectation of profits to be derived from the efforts of others (the Apple team).

Longer answer:

On the flip side, another category an investment might fall under is as a ‘commodity.’

A commodity is an unchangeable ‘thing,’ whereas a security is a changeable ‘common enterprise.’

For example:

Oil is a commodity. It can’t be changed. You can buy and sell oil, but no one can never change what it is.

Whereas Apple is a security. It can be changed. Tim Cook and the Apple board could decide to stop selling iPhones and start building toaster ovens tomorrow.

It’d be a terrible idea - but they could do it! And that decision would effect the stock price significantly.

And that’s what makes it a security: folks have invested their money in Apple with a reasonable expectation of profits, derived from the efforts of the Apple team.