What is a security?

A security is defined as a financial instrument that holds monetary value and can be traded. This encompasses a wide range of investment options, including stocks, bonds, and mutual funds. Securities represent ownership (as in the case of stocks), a creditor relationship with a governmental body or corporation (as in the case of bonds), or rights to ownership or income (as in the case of derivatives).

The key aspect of securities is that they are tradable, meaning they can be bought and sold on various markets, providing liquidity for investors and enabling them to participate in financial markets. The regulatory framework governing these instruments ensures transparency and protects the interests of investors.

In contrast, the other options provide definitions that do not accurately capture the essence of what a security is. A document providing a loan refers to a contractual agreement rather than a financial instrument itself. A type of insurance policy is fundamentally different as it relates to risk management rather than investment and trading. Lastly, a government-issued currency represents a medium of exchange rather than an instrument that can be traded as an investment asset. Therefore, recognizing securities as tradable financial instruments that have monetary value is critical in understanding their role in the financial system.