Marketable securities are the liquid assets that are readily convertible into cash that is reported under the head current asset in the balance sheet of the company and the top example of which includes commercial paper, Treasury bills, and the other different money market instruments.
Marketable securities are liquid financial instruments that can be quickly converted into cash at a reasonable price.
The liquidity of marketable securities comes from the fact that the maturities tend to be less than one year and that the rates at which they can be bought or sold have little effect on prices.
- Marketable securities are assets that can be liquidated to cash quickly.
- These short-term liquid securities can be bought or sold on a public stock exchange or a public bond exchange.
- These securities tend to mature in a year or less and can be either debt or equity.
- Marketable securities include common stock, Treasury bills and money market instruments among others.
- Marketable securities are classified as either marketable equity security or marketable debt security
- Other requirements of marketable securities include having a strong secondary market that can facilitate quick buy and sell transactions and having a secondary market that provides accurate price quotes for investors.
Example:- Stocks, bonds, preferred shares, and ETFs are among the most common examples of marketable securities. Money market instruments and hedge fund investments can also be marketable securities.
Characteristics of Marketable Securities
Some investors are more eager to grab this type of investment because of the short maturity period, which tends to be less than a year.
Converting or liquidating these investments into cash is much easier than is the case with longer-term securities.
Marketable securities are characterized by :-
- A maturity period of one year or less.
- The ability to be bought or sold on a public stock exchange of public bond exchange.
- Having a strong secondary market that makes for liquid buy and sell transactions as well as rendering an accurate price valuation for investors.
- Have higher liquidity effectively lowering risk.
- Be expected to be converted into cash within one year.
Naturally, the suitability of investments in marketable securities will depend on the investment strategy of the investor or the firm.
Marketable securities will often have lower returns compared to longer periods 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.
How do Marketable Securities work ?
There are three different ways marketable securities can be categorized by an investor. Their intended purpose will determine how they are handled from an accounting perspective.
1. Trading Securities
These marketable securities are purchased as a means to generate short-term profit and are generally held for less than 1 year.
They are listed at fair value on a balance sheet and any gains or losses made during the holding period are also recorded. Temporary fluctuations in market value are recorded on an income statement.
2. Held to Maturity
These marketable securities are held by companies until they reach their maturity date. If that date is within one year of the Purchase date their considered short-term investment.
If the date is greater than one year from the Purchase date they are considered a long-term investment and are noncurrent assets.
They are listed at fair value on a balance sheet but do not record temporary fluctuations in market value. However, any realized gains or losses are included on the balance sheet.
3. Available for Sale
These are debt and equity securities that are not intended to be traded for profit or held until maturity.
They are listed at fair value on a balance sheet, along with any unrealized gains or losses. Unlike trading securities and unrealized gains and losses do not need to be reported on an income statement.
Types of Marketable Securities
There are many different types of marketable securities but they all fall under one of two categories:- Marketable debt securities or Marketable equity securities.
1. Marketable Debt Securities
Marketable debt securities are short-term bonds (<1 year) issued by a government or public company and held by an investor.
- Government bonds
- Corporate bonds
- Certificates of deposit
- Treasury bills
2. Marketable Equity Securities
Marketable equity securities are equities issued by a public company and held by an investor.
- Common Stock
- Preferred shares
Marketable equity securities are generally considered short-term investments and listed as current or non-current assets depending on their intended purpose.
However if the securities and purchased as a means to acquire or control the issuing company they would be reported as long-term Investments.
Advantages of Marketable Securities
- It helps an entity to maintain a certain level of liquidity and thereby reduce the liquidity risk. Liquidity risk refers to the risk that an entity might not have enough resources to fund its present obligations.
- By investing in marketable securities the funds of the entity are arranged in such sources out of which funds can be realized as and when required.
- Marketable securities present better returns than cash equivalents. Thus, it is better for entities to invest an adequate portion of their cash in marketable securities so that high returns are achieved by the entity on its cash funds.
- The liabilities of any entity are divided into short term and long term liabilities. The quantum of marketable securities helps the entity in meeting its short term liabilities.
- An entity can match the maturity of its marketable securities with the due dates of its short term liabilities and analyze if any gas is there so that the same can be filled by infusing funds.
- The marketable securities can be used by the analysts in calculating various liquidity ratios for understanding the financial standing of the company.
Disadvantages of Marketable Securities
- An entity may still face a liquidity crisis even if marketable securities are maintained as it becomes difficult to match Assets and liabilities date by date.
- To counter this, entities can keep reserves so that those funds can be utilized as and when an emergency arises.
- If there is any statutory requirement to maintain a minimum level of funds in marketable securities then it may become non-feasible for entities since the companies might be losing on higher returns which they could have earned had they interested in other opportunities.