A financial security that has the characteristics of debt and equity. A classic example of hybrids (hybrid securities) is the preferred stock (preference stock) that constitutes an ownership stake in a company/ a business (i.e., the equity component) but also provides fixed payments (which is the debt component that makes it bond-like).

Hybrid securities evolved over time into more complex forms of structured securities. The structuring process either starts with the security as a debt security, which is embedded with an option for conversion to equity. The debt security allows the holder to receive a series of payments (floating or fixed), based on a periodic rate of return. A hybrid security may also structured starting as an equity-related security, with the addition of a fixed-income mechanism to generate a fixed or stable stream of cash flows over the lifespan of the security. Other types of hybrid securities include convertible securities (convertible notes/ bonds), capital notes, etc.

Broadly speaking, a hybrid security is any security that combines two different types of underlying instruments/ investments, or more. A bond-like structured note may have its interest rate linked to a specific commodity price, in such a way that movement in the commodity price will impact the underlying interest rate in either direction, and consequently affect the interest rate payments associated with the note. By nature, hybrid securities can be tailored to meet the needs of their holders.

Hybrid securities provide protection against loss of the invested amount during bankruptcy (while common stock does not provide such a protection). The hybrid investors are rank  before common stockholders in terms of ability to redeem the face value of their securities in the case of bankruptcy. Moreover, hybrid securities provide a higher rate of return compared with the typical debt instruments.