What is Marketable Securities?
Stocks, bonds, and similar marketable securities can usually be converted to cash quickly and at a fair price. Marketable securities are considered liquid due to their short average maturities of less than a year and the low impact of interest rate fluctuations on their prices.
KEY POINTS
- Investments in marketable securities can be converted into cold hard cash at a moment’s notice.
- Securities with a relatively short maturity that are readily available for purchase and sale can be considered short-term liquid securities.
- Debt or equity, the typical term of maturity for such securities is a year or less.
- Among the many types of marketable securities are shares of stock, Treasury bills, and money market instruments.
Marketable Securities: Basic Insights
Companies usually set aside funds in the event of a sudden need to act, such as when an acquisition opportunity presents itself or when making a contingent payment. Instead of keeping all of its cash on hand in bank accounts, where it would earn no interest, a smart company would invest some of its cash in short-term liquid securities.
As a result, the company can put its cash to work for it, rather than letting it sit in a savings account earning nothing. These securities are easy for the company to sell if an unexpected need for cash arises. One type of assets that can be used as a short-term investment is marketable securities.
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To be considered a marketable security, a financial instrument must be freely traded on a public stock or bond exchange with no restrictions. As a result, marketable securities can be broken down into two broad categories: equity securities and debt securities.
In addition to meeting the foregoing criteria, marketable securities must also have a liquid secondary market that allows for prompt buy and sell transactions and that gives investors access to reliable price quotations.
Because marketable securities are readily available and generally thought of as safe investments, the return on these types of securities is low.
Securities that can be traded on an exchange include stocks, bonds, banker’s acceptances, commercial paper, Treasury bills, and other money market instruments.
Types of Marketable Securities
Equity Securities
Equity securities, such as common stock and preferred stock, are both tradable options. Shares of stock in a public company that are held by another company are referred to as “equity securities” and are recorded in the financial statements of the holding company.
The holding company will classify the stock as a current asset if it plans to sell or liquidate it within the next year. But if the firm plans to keep the stock for more than a year, it will be classified as a long-term, or non-current, asset.
There is a listing at the lower of cost or market for all equity securities that are either currently trading or can be traded in the near future.
Marketable equity securities do not include investments made by one company in the equity of another company with the intent of acquiring or controlling that company. On its balance sheet, the company instead shows them as a long-term investment.
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Debt Securities
Any short-term bond issued by a public company and held by another company is considered a marketable debt security. Companies often hold marketable debt securities instead of cash, making a liquid secondary market all the more crucial.
Until a gain or loss is realized on the sale of a debt instrument, the cost basis of all marketable debt securities is recorded as a current asset on a company’s balance sheet.
Debt securities that are readily tradeable are held as liquid investments with a one-year time horizon. On the balance sheet, a debt security should be labeled as a long-term investment if it will be held for more than a year.
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