Chapter 8: Classification of Securities

Securities are customarily divided into the two main groups of bonds and stocks, with the latter subdivided into preferred stocks and common stocks. The first and basic division recognises and conforms to the fundamental legal distinction between the creditor's position and the partner's position. The bondholder has a fixed and prior claim for principle and interest; the stockholder assumes the major risks and shares in the profits of ownership. It follows that a higher degree of safety should inhere in bonds as a class, while greater opportunity of speculative gain- to offset the greater hazard- is to be found in the field of stocks.

Classification

1) Securities of the fixed-income and stable-value type: A high-grade bond or preferred stock

2) Senior securities of the fluctuating-value type
A. Well-protected issues with profit possibilities: A high-grade convertible bond
B. Inadequately protected issues: A lower-grade bond or preferred stock

3) Common stock type: A common stock