Marketable securities are financial products that can be converted into cash quickly and affordably. Marketable securities are liquid because their usual maturities are shorter than a year, and the rates at which they can be bought or sold have little effect on their pricing.
Businesses typically keep cash in reserve to be prepared for situations where they may need to act swiftly, such grasping an acquisition opportunity that occurs or making contingent payments. Yet, a company will not store all of the cash in its bank accounts, where there is little opportunity of earning interest, but will instead invest some of it in short-term liquid securities.
Instead of letting its cash sit idle, the company may make returns on it in this way. If an emergency cash flow situation occurs, the company can easily sell these securities. An illustration of a short-term investment product is a piece of property classified as a marketable security.
Certain investors are especially prepared to take advantage of the opportunity because these investments frequently mature in less than a year. These investments can be converted or liquidated into cash considerably more easily than longer-term securities.
Marketable securities are characterized by:
- A year or shorter for maturity
- The capability of being purchased or sold on a public stock or bond exchange
- Having a robust secondary market that facilitates liquid buy and sell transactions and provides investors with an accurate price valuation
- NOT cash or cash equivalents, which have reduced risk and more liquidity (money market securities due within 3 months)
Consequently, the acceptability of marketable securities investments will rely on the investor's or company's investment strategy. Marketable securities will often have lower returns compared to longer-period or open-ended investments such as stocks. Since the marketable security is only held for a year or less, there is a lower maturity risk and liquidity risk built into the product.
The two different categories of marketable equity securities are preferred stock and common stock. They are classified as equity securities of a publicly traded company that is owned by another corporation on the holding company's balance sheet.
If it is anticipated that the stock will be exchanged or liquidated within a year, the holding company will classify it as a current asset. However, if the company plans to maintain the shares for more than a year, the equity will be reported as a non-current asset. Marketable equity securities, both current and noncurrent, are all listed at the lower of cost or market value.
Whenever a business buys shares of another company with the goal of acquiring or controlling that company, the securities are not regarded as marketable equity securities. Instead, the company lists them as a long-term investment on its balance sheet.
A marketable debt security is recognised as any short-term bond issued by a publicly traded company that is held by another corporation. Because a corporation often holds marketable debt securities rather than cash, a developed secondary market is even more important. All marketable debt securities are maintained at cost as a current asset on a company's balance sheet until a gain or loss is recognised upon the sale of the debt instrument.
With a one-year sales horizon, marketable debt securities are kept as short-term investments. If it is anticipated that a debt security will be retained for more than a year, it should be represented as a long-term investment on the company's balance sheet.
- Investments that can be quickly turned into cash are known as marketable securities.
- These short-term liquid securities can be bought or sold on these publicly traded stock exchanges and public bond exchanges.
- These instruments, which may be debt or equity, frequently reach their maturity in a year or less.
- Marketable securities include things like Treasury notes, money market instruments, common stock, and more.