Understanding Securities: Types, Characteristics, and Trading
Item 6: Securities
Valores.Concepto Titles
Securities, also called credit instruments, are documents representing a unilateral promise to provide a specific benefit to the legitimate holder. They facilitate the flow of goods by establishing a clear framework for their exchange.
Fundamental Character of Securities
Possession and Presentation: Possessing the physical document is essential to exercise the rights it represents. Without the document, the rights cannot be enforced. Possession determines the creditor’s ability to exercise their right (active standing) and relieves them of the burden of proof. The debtor is only obligated to the document holder (passive standing) and is discharged from payment if made in good faith to the presenter.
Appearance of Ownership: Possession creates the appearance of ownership. The holder doesn’t need to prove legitimacy; the debtor must raise any ownership questions and may refuse payment if doubts exist.
Literalness: The rights are defined solely by the text of the document, preventing the debtor from raising exceptions based on external factors.
Independence: The rights of a holder are independent of previous holders and their relationships with the debtor. The debtor cannot oppose a new holder based on issues with prior holders.
Legal Protection: The law protects the holder, compelling the issuer to honor the obligations stated in the document.
Transferability: Securities are treated as movable property, subject to legal transactions and property rights.
Classes of Securities
- By Causal Relationship: Causal or abstract, depending on whether the underlying cause influences the obligation.
- By Incorporation of Right: Physical possession required or other means suffice.
- By Literalness: Complete or incomplete.
- By Object of Right: Personal or real, representing rights within an entity or power over assets, respectively.
- By Issuance Method: Individual or mass issuance.
- By Substantiation: Main (independent right) or accessory (derived right).
- By Holder Designation: Bearer, order, or registered.
Registered, Bearer, and Order Securities
Registered Securities: Designate a specific person as the holder, who alone can enforce the obligation or transfer it by endorsement. Transfer requires notification to the debtor or issuer.
Bearer Securities: Do not specify a holder. The debtor is obligated to whoever presents the title but may require proof of legitimate ownership. Discharge occurs upon good-faith payment to the presenter.
Order Securities: Nominative (require holder’s name) but require endorsement by each holder for transfer. The bill of exchange is a prime example.
Divestiture and Book Entries
Book entries are a modern alternative to traditional securities, representing rights through electronic records rather than physical documents. This is facilitated by computer technology, enabling intangible representation of legal relations in financial markets.
Examples of Securitized Rights
- Bill of Lading: Right to withdraw shipped goods (maritime).
- Waybill: Right to receive payment (land).
- Stocks: Shareholder rights, including voting rights.