Junior Security: Priority and Risk

A junior security is a form of financial asset with a lower claim on assets or income compared to senior securities. Common shares typically function as junior securities, while bonds are the more recognizable form of senior securities. In the case of financial compensation, senior securities are paid first, with any leftover cash then divided among the junior security holders. Because of the larger risk associated with junior securities, holders of such assets usually enjoy a bigger reward than those who have invested in more dependable senior securities.

In essence, junior security holders have an expectation of a greater reward than other securities of the same company, but also a higher risk of not receiving any funds. Junior security holders are the first to be affected if a company goes into default, and if the company’s assets are not able to cover the debt obligations, investors may see little or none of their return on investment. It’s important to remember, however, that not all defaults are financial disasters. A company may default today but investors can still eventually recover some of their funds over time, as assets are reorganized and/or restructured.

Not all junior securities are stocks, however. Subordinated debt, which is a form of bond issued by a company with a lower priority than its ordinary bonds, can also function as junior securities. This underlying debt has the same characteristics as an equity, but is a form of debt, hence gaining a higher claim for repayment than traditional equity holders in the case of default or liquidation.

In summary, junior securities are characterized by higher risk but also potential for greater gains. This is the opposite of senior securities, which are more secure but may yield lower returns. Investors opting for junior securities should carefully consider the assets they buy and the inherent risks.