To carry on business, a corporation needs an almost endless variety of real assets. These do
not drop free from a blue sky; they need to be paid for. The corporation pays for the real assets
by selling claims on them and on the cash flow that they will generate. These claims are called
financial assets or securities. Take a bank loan as an example. The bank provides the corporation
with cash in exchange for a financial asset, which is the corporation’s promise to repay the
loan with interest. An ordinary bank loan is not a security, however, because it is held by the
bank and not sold or traded in financial markets.
Take a corporate bond as a second example. The corporation sells the bond to investors in
exchange for the promise to pay interest on the bond and to pay off the bond at its maturity.
The bond is a financial asset, and also a security, because it can be held and traded by many
investors in financial markets. Securities include bonds, shares of stock, and a dizzying variety
of specialized instruments. We describe bonds in Chapter 3, stocks in Chapter 4, and other
securities in later chapters.
This suggests the following definitions: