Securities, Commodities, and Investments

Significant Points

•    Most workers in this industry hold associate or bachelor’s degrees.
•    Employment is expected to grow as a result of increasing investment in securities and commodities, along with a growing need for investment advice.
•    The high earnings of successful securities sales agents and investment bankers will result in keen competition for these positions.

Nature of the Industry

The securities, commodities, and other investments industry comprises a diverse group of companies and organizations that manage the issuance, purchase, and sale of financial instruments. These instruments—often called securities—are contracts which give their owner the right to an asset or the right to purchase an asset in the future. Companies sell these financial instruments to raise money from investors to finance new business operations or to improve or expand existing ones. Investors purchase these instruments with the goal of earning money by earning dividends, interest, executing the agreement, or selling the security at a higher price.

Goods and services.

The securities industry is made up of a variety of firms and organizations that structure investments, bring together buyers and sellers of securities and commodities, manage investments, and offer financial advice. The products provided by the industry are called securities. The most basic types of security are stocks and bonds, which provide capital to finance corporations. Stocks entitle their holders to partial ownership of a company, whereas bonds are a form of debt that a company pays back with interest. Investors purchase stocks and bonds in order to earn money in the form of dividends or interest, or to sell the issues to other investors at a higher price.

Another type of security is called a derivative, which is a contract to purchase an asset at a specified future date. There are two basic types of derivatives: options and futures. An investor who holds an option has a contractual right to purchase an asset at a set price on a specified date, but is not required to do so. A futures contract is an agreement to purchase an asset at a set price and date with no option to decline. Commodities, for example, corn, wheat, and pork bellies, are often bought and sold in this way, and are among the best-known derivatives. Other goods sold on the derivatives market include foreign currencies, precious metals, oil and natural gas, and electricity. Buyers purchase derivatives with the hope that the price of the asset involved will be higher than the agreed price when the contract matures.

Mutual funds and exchange traded funds (ETFs) are also common investments. In both cases, the issuing firm owns a large portfolio of other securities which, on average, are expected to increase in value. In the case of mutual funds, this portfolio is typically managed by a team of financial analysts who determine which stocks to buy and sell; however, some mutual funds are not actively managed and are instead designed to track a benchmark index, such as the Standard and Poor’s 500 or Dow Jones Industrial Average. Exchange traded funds are almost always designed to replicate a stock index. ETFs can be traded like stocks, unlike mutual funds. Because both of these types of securities require management, the companies who issue them charge a fee. Investors are willing to pay this fee because mutual funds and ETFs have a lower level of risk than other securities.

Besides selling securities, segments of the securities industry also sell advisory services. Investment banks, for example, help companies to plan stock or bond issues and sell them to investors. Securities and commodities exchanges, on the other hand, provide forums for buyers and sellers to trade securities. Private banks and investment advisories help individual investors to determine how to invest their money.
Industry organization.

The securities industry is organized by the types of products and services they produce. Investment banks help corporations to finance their operations by underwriting—or purchasing and reselling—new stock and bond issues. They also provide advisory services to companies who are issuing securities or undergoing a merger or acquisition. The typical investment bank has several departments, each of which specializes in a specific part of the process. Corporate finance specializes in structuring stock and bond issues. They are often involved in initial public offerings (IPOs) of the stock of companies that are selling to the public for the first time. Mergers and acquisitions departments help companies plan and manage the purchase of other companies. Sales and trading departments work together to sell underwritten securities to investors. Research and quantitative analytics departments specialize in studying company financial reports to help the bank and its customers make informed decisions about stock purchases.

Securities and commodities exchanges offer a central location where buyers and sellers of securities meet to trade securities and commodities. All of the major exchanges have been at least partially computerized, but the trading floors are still very active. While a small number of workers at the exchanges are actually employed by the exchanges themselves, most of the people who work there are actually employed by other firms. These include investment banking and brokerage firms, as well as specialist firms that manage the sale of securities for listed companies.

Brokerage firms trade securities for those who cannot directly trade on exchanges. Investors place their buy and sell orders by telephone, online, or through a broker. Since most brokerage firms are fairly large, many orders are filled by other buyers and sellers who use the same brokerage. If the stock or commodity is sold on an exchange, the firm may send the order electronically to the company’s floor broker at the exchange. The floor broker then posts the order and executes the trade by finding a seller or buyer who offers the best price for the client. Alternatively, the broker can access an electronic market that lists the prices for which dealers in that particular security are willing to buy or sell it. If the broker finds an acceptable price, then a purchase or sale is made. Firms can also buy and sell securities and commodities on electronic communications networks (ECNs), which are powerful computer systems that automatically list, match, and execute trades, eliminating the floor broker.

Brokerage firms are usually classified as full-service or discount. Investors who do not have time to research investments on their own will likely rely on full-service brokers to help them construct investment portfolios, manage their investments, and make recommendations regarding which investments to buy. Full-service brokers have access to a wide range of reports and analyses developed by financial analysts who research companies and recommend investments to people with different financial needs. People who prefer to select their own investments often use discount or online brokerages and pay lower fees and commission charges. Discount firms, also known as wire houses, usually do not offer advice about specific securities, although they may still provide access to reports. Most brokerage firms now have call centers staffed with both licensed sales agents and customer service representatives who take orders and answer questions at all hours of the day.

Investment advisory firms are also included in this industry. Much like full-service brokerages, these firms provide advice to their investors on how to best manage their investments. However, they also provide advice on other matters, such as life insurance, estate planning and tax preparation. In exchange, advisors act as brokers and receive fees and commissions for investments and insurance purchases. They may also charge fees for consultations.

Portfolio management firms, such as mutual funds, hedge funds, and private banks manage a pool of money for investors in exchange for fees. This frees individual investors from having to manage their own portfolios and puts their money in the hands of experienced professionals. In a mutual fund, this pool of money comes from investors who purchase shares of the mutual fund. Hedge funds are similar, although their shares are only available to certain experienced investors—called accredited investors—as they are considered very risky. In private banks, the pool of money comes from a wealthy individual. Portfolio management companies have teams of financial analysts who determine which securities should be bought and sold.



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