What Are Marketable Securities?
Definition: Marketable securities are financial instruments, like securities and debts, that can be converted into cash over a short period, usually under one year. The liquid financial instruments are considered marketable on the fact that they can be sold with ease and with little impact on their prices.
Marketable securities also include unrestricted financial instruments that are easily bought and sold on any public exchange. Such instruments include things like government bonds, common stock as well as certificates of deposit.
In a balance sheet, marketable securities appear on the current assets section as long as they can be converted into cash within one year. Such financial instrument is often listed on the balance sheet with their prevailing market value. In contrast, marketable securities not trading in the market are listed in the non-current asset section in the balance sheet.
Marketable securities come about as businesses and companies set aside cash or invest in liquid securities to generate short-term interest. Instead of letting money lie idle in a bank and depreciate due to inflation, a company can decide to invest in government bonds or stocks to earn some money on the side.
Whenever a sudden need for cash arises, a company can liquidate any of these underlying marketable securities. However, it is important to note that the return on marketable securities is not always the best as such securities can be sold during a downtown, resulting in substantial losses.
Types of Marketable Securities
Marketable Equity Securities and Marketable Debt Securities are the two main types of marketable securities.
Marketable Equity Securities
Marketable Equity securities are short-term investments made in the equity markets, in stocks to be specific. In this case, they are often common or preferred stock. Such securities represent equity investments in securities of publicly traded companies.
If a company invests in stock and opts to hold it for less than one year, then the investments will be listed as a current asset. Likewise, if the company invests in stocks and opts to hold the investments for more than a year, then the same will appear in the non-current asset section. Conversely, if a company invests in another company’s equity with the aim of acquiring the company wholly, then the same is listed as a long-term investment.
Marketable Debt Securities
Marketable debt securities refer to short-term bonds issued by a public company and purchased/held by a different company. These investments are listed as a current asset on the company’s balance sheet if they have owned them for less than one year.
Why do Marketable Securities Matter
Companies, especially in the financial sector, feature marketable securities in a more prominent place in the balance sheet as such securities account for a huge chunk of total income. Analysts, on the other hand, rely on this information in the balance sheet to ascertain the liquidity ratio. Creditors may also use the data to ascertain liquid assets that would come in handy when solving solvency issues.
Marketable securities also provide valuable information of the amount of capital that a business can access with ease.
Summary
Marketable Securities provide firms with an easy way of generating some interest, on the side, instead of letting cash lie idle in a bank. Similarly, over-investing in marketable securities can be as wasteful as under-investing.
Putting too much money in marketable securities ensures businesses have sufficient cash that can be accessed with ease to address short-term needs. Conversely putting too much cash in short term assets increases the risk of a firm earning lower rates of return, compared to when the money is invested in long-term assets.