Marketable Securities are the financial instruments that one can easily buy or sell in the market. The maturities of these financial instruments are usually less than a year. Since they have high liquidity, these investments are good for businesses that need quick cash. Some examples of these financial instruments are government bonds, common stock, or certificates of deposit.
Businesses keep their cash in reserves. Such reserves help them in situations when they require cash, like for acquisitions or any unforeseen payment. However, companies do not put all their cash in the reserves. Instead, they invest some in short-term liquid securities to earn interest. This way, the cash not only earns an interest income, but a company can also easily liquidate the investment to meet any future cash needs.
The returns on such securities are relatively lower due to their liquidity and the fact that we see them as safe investments. Apple holds a major portion of its wealth in the form of such securities.
- These are highly liquid, meaning one can easily buy and sell these securities.
- They are easily transferable on a stock exchange or otherwise.
- Offer a lower rate of return.
- These are highly marketable as there are active marketplaces where they can be bought or sold.
Marketable securities broadly have two groups – marketable debt securities and marketable equity securities.
Marketable debt securities are government bonds and corporate bonds. One can trade these on the public exchange, and their market price is also readily available. In the balance sheet, all marketable debt securities are shown as current at the cost until a company realizes a gain or loss on the sale of the debt instrument.
Marketable equity securities are common stock and most preferred stock as well. One can also easily trade them on the public exchanges, and their market price information is easily available. All marketable equity securities are shown in the balance sheet at either cost or market, whichever is lower.
There is also a third type of marketable securities classified further into three categories – money market instruments, derivatives, and indirect investments. Indirect investments include money put into hedge funds and unit trusts.
Derivatives are the investments that are dependent on another security for their value, like futures, options, and warrants.
Money market securities are short-term bonds, like Treasury bills (T-bills), banker’s acceptances, and commercial paper. Big financial entities purchase these in massive quantities.
Why Invest in them?
Better than idle Cash
Cash lying idle does not give any return, and cash in the bank account offers meager returns. Therefore, investing in such securities provides a better return and the safety of investment as well.
Paying Short-term Liabilities
Short-term liabilities are payable within a year. So, marketable securities, which also liquidate after a year, are the best way to pay such liabilities as they are highly liquid and earn some income in the meantime.
To borrow funds from financial institutions, companies have to follow some guidelines. These guidelines could be in the form of maintaining a certain level of working capital and investing in cash. Moreover, these requirements are often in the form of ratios. So, marketable securities help a company meet such guidelines with liquidity and solvency ratios.
Marketable securities are shown as current assets due to their liquidity. They are also used for calculating working capital. Such securities are usually shown under the cash, and cash equivalents account in the balance sheet. However, if a company intends to hold the security for more than a year, it will be shown as a non-current asset.
Also, if a company is holding another company’s equity with an intention to acquire that company, then the securities are not regarded as marketable equity securities. Instead, the company lists them as a long-term investment.
Similarly, for debt security, if a company plans to keep it for more than a year, we must show it as a long-term investment on the balance sheet.
Marketable securities usually are a small figure on the balance sheet of nonfinancial companies. However, it is much more important for financial companies as they earn a noticeable income from these investments. And thus, it gets a more visible place on their balance sheet.
Importance to Third Parties
Analysts use such instruments to calculate various liquidity ratios, like cash, quick, and current ratios. These liquidity ratios measure a company’s short-term financial standing or if a company has sufficient liquid assets to pay its short-term debts.
Creditors too show interest in the information to assess the liquidity position of the company in case of solvency issues.
How Is It Different from Investment Securities?
The intent is the only difference between the two. A company buys marketable security with the intent to convert it into cash when needed. Or, if a company buys security with short-term goals in mind, then it is more marketable than the one with long-term goals.
There are securities that are not liquid assets and liquid assets that are not securities. For security to qualify as marketable security, it must fulfill the requirement of being financial security – give a right to ownership, carry a price, represent interest as an owner, and allow an opportunity to the buyer to profit from the investment.