Marketable securities

3 key takeaways

• Marketable securities are highly liquid assets that can be sold or converted into cash quickly without a significant loss in value.
• They include short-term investments such as stocks, bonds, and Treasury bills.
• Companies and investors hold marketable securities to manage liquidity and generate returns on idle cash.

What are marketable securities?

Marketable securities are financial instruments that are easily bought, sold, or traded on public exchanges. They are considered near-cash assets due to their high liquidity and the ability to be quickly converted into cash. These securities are typically short-term, with maturities of less than one year, and are often used by companies and investors to manage cash flow and liquidity.

Marketable securities include a wide range of financial instruments such as stocks, bonds, Treasury bills, and commercial paper. They are valued at their market price, which is readily available on public exchanges or over-the-counter markets.

Importance of marketable securities

Marketable securities are important for several reasons:

1. Liquidity Management: They provide companies and investors with a way to manage liquidity, ensuring that they have access to cash when needed without disrupting long-term investments.
2. Risk Management: Holding marketable securities can reduce risk by providing a safe, liquid investment option that can be sold quickly in response to market changes.
3. Short-term Investments: They offer a way to earn returns on idle cash, making them a useful tool for short-term investment strategies.
4. Financial Flexibility: Companies use marketable securities to maintain financial flexibility, allowing them to meet short-term obligations and take advantage of investment opportunities.

Types of marketable securities

Marketable securities can be broadly categorized into two types: equity securities and debt securities.

1. Equity Securities

• Stocks: Shares of ownership in a company that are traded on stock exchanges. Stocks are considered marketable securities because they can be quickly bought and sold at market prices.

1. Debt Securities

• Treasury Bills (T-Bills): Short-term government securities with maturities ranging from a few days to one year. T-bills are highly liquid and considered low-risk investments.
• Commercial Paper: Unsecured, short-term debt issued by corporations to meet immediate financing needs. It typically has maturities of less than 270 days.
• Certificates of Deposit (CDs): Time deposits offered by banks with fixed interest rates and maturities. CDs can be marketable if they can be sold in a secondary market before maturity.
• Municipal Bonds: Short-term debt issued by state and local governments. While longer-term municipal bonds exist, short-term notes are considered marketable.

How to evaluate marketable securities

Evaluating marketable securities involves assessing their liquidity, risk, and return potential:

1. Liquidity: The ease with which a security can be converted into cash without significantly affecting its price. Highly liquid securities have active markets with frequent trading.
2. Risk: The level of uncertainty associated with the security’s returns. Low-risk marketable securities include government T-bills and high-quality commercial paper, while stocks may carry higher risk.
3. Return: The expected earnings from the security, which can come from interest, dividends, or capital gains. The return should be evaluated relative to the security’s risk and liquidity.

For example, a company might hold a combination of T-bills for their low risk and high liquidity, and stocks for their higher return potential, balancing the need for safety and growth.

Examples of marketable securities

• Apple Inc. Stock: Shares of Apple Inc. are highly liquid and traded on the NASDAQ, making them marketable securities.
• U.S. Treasury Bills: Short-term government securities that are sold at auction and can be easily bought and sold in the secondary market.
• General Electric Commercial Paper: Short-term debt issued by General Electric to meet immediate financing needs, traded in the money market.

Implications of holding marketable securities

Holding marketable securities has several implications for businesses and investors:

• Liquidity Management: Companies can manage cash flow and ensure they have funds available to meet short-term obligations.
• Investment Strategy: Marketable securities offer a way to earn returns on surplus cash while maintaining flexibility.
• Balance Sheet Impact: Marketable securities are listed as current assets on a company’s balance sheet, enhancing financial stability and attractiveness to investors.

However, marketable securities can also be affected by market conditions, interest rates, and economic factors, which can impact their value and liquidity.

Challenges in managing marketable securities

Managing marketable securities involves several challenges:

• Market Volatility: Changes in market conditions can affect the value and liquidity of marketable securities, leading to potential losses.
• Interest Rate Risk: Fluctuations in interest rates can impact the returns on debt securities, such as T-bills and commercial paper.
• Credit Risk: The risk that the issuer of a debt security may default on its obligations, affecting the security’s value.

Related topics

To further understand marketable securities, explore related concepts such as liquidity management, which examines strategies for maintaining adequate cash flow. Investment portfolio looks at the composition and management of a collection of investments, including marketable securities. Risk management focuses on identifying and mitigating financial risks. Financial instruments provide a broader context for various types of assets and securities. Additionally, studying money markets offers insights into the trading of short-term financial instruments.

For a comprehensive exploration into liquidity management, investment portfolio, risk management, financial instruments, and money markets, delve into these topics to enhance your understanding of marketable securities and their role in financial strategy and management.