Marketable security definition
/What is a Marketable Security?
A marketable security is an easily traded investment that is readily converted into cash, usually because there is a strong secondary market for the security. Such securities are typically traded on a public exchange, where price quotes are readily available. The trade-off for the high level of liquidity is that the return on marketable securities is usually low.
Presentation of Marketable Securities
Marketable securities are recorded as a current asset on the balance sheet, since they have a maturity of less than one year. This is of some importance when calculating the current ratio, since marketable securities are included in the numerator of that calculation, and make a business look more liquid.
Examples of Marketable Securities
Examples of marketable securities are as follows:
Equity Securities. These represent ownership in a company and are traded on stock exchanges.
Common stocks. Shares in publicly traded companies (e.g., Apple, Tesla, Microsoft).
Preferred stocks. Hybrid securities with fixed dividends and priority over common stocks.
Exchange-traded funds (ETFs). Funds that track an index (e.g., S&P 500 ETFs).
American depositary receipts. Foreign company stocks traded in U.S. markets.
Debt Securities. These are loans made by investors to governments or corporations.
Treasury bills. Short-term U.S. government securities (maturity ≤ 1 year).
Treasury notes. Medium-term U.S. government bonds (1-10 years maturity).
Treasury bonds. Long-term U.S. government bonds (10+ years maturity).
Corporate bonds. Debt issued by corporations to fund operations.
Municipal bonds. Bonds issued by local/state governments, often tax-exempt.
Commercial paper. Short-term unsecured corporate debt (maturity ≤ 270 days).
Certificates of deposit. Fixed-term bank deposits that pay interest.
Cash Equivalents. Highly liquid assets that can be quickly converted into cash.
Money market funds. Low-risk funds that invest in short-term debt instruments.
Treasury bills. Considered both a debt security and a cash equivalent.
Repurchase agreements. Short-term borrowing secured by government securities.
Short-term government bonds. Highly liquid and low-risk securities.
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When to Invest in Marketable Securities
A conservatively-run business may place a large proportion of its excess cash in marketable securities, so that it can easily liquidate them if there is a sudden need for cash. This is most likely to be the case when a business has many opportunities for expansion or acquisitions, and so will probably need cash on short notice in order to take advantage of them.
A tightly-managed treasury department that has a clear understanding of expected cash flows may pursue higher-return investments which typically require longer maturities, and so will invest a smaller proportion of excess cash in marketable securities. This is most likely to be the case when a firm’s budgeting process is tightly regimented and closely followed throughout the budget year, so that management knows exactly when cash will be needed.