Marketable Securities

What are marketable securities?

Marketable securities are a type of liquid asset businesses can quickly convert into cash. Companies invest money into these short-term liquid securities to earn returns. If a business needs cash, it can easily liquidate the marketable securities. 

Investors and traders use brokerage trading platforms to analyze the market and financial opportunities available. Additionally, these tools evaluate the risk associated with trading opportunities and facilitate the opening, closing, and managing market positions of investors and traders.

Types of marketable securities

Marketable securities are either marketable debt securities or marketable equity securities.

Marketable debt securities are short-term bonds bought and sold between two parties. For example, government and corporate bonds can be traded on the public exchange.

Corporations issue corporate bonds and sell them to investors. Investors lend money to corporations in exchange for conditions outlined in the bond. Companies hold marketable debt securities at cost on their balance sheet as an asset until a gain or loss occurs post-sale of the debt.

Marketable equity securities consist of common or preferred stocks. Corporations hold equity securities of public companies and the holding company lists the equity securities on its balance sheet using equity management software.

Holding companies list stock they expect to liquidate or trade within one year as a current asset. Conversely, if a holding company anticipates having the stock for more than one year, it gets listed as a non-current asset on the balance sheet. 

Characteristics of marketable securities

Generally, marketable securities possess the following characteristics:

• They can be purchased or sold on a public exchange. Stocks can be bought or traded on a public stock exchange and bonds can be purchased or sold on a public bond exchange.

• They’re highly liquid. Marketable securities must be able to convert into cash in a short period of time. Generally, a short period is one year or less, but there are no set rules regarding the timeframe for liquidation. 

• They’re easy to transfer. Complementary to being highly liquid, marketable securities must be easily transferable. Transfers are from party to party or from asset to cash. 

Benefits of marketable securities

Businesses invest in marketable securities in the hopes of gaining benefits that might include:

• Additional revenue from interest and dividends. Since marketable securities are investments, they earn interest and dividend revenue. Investing provides more returns than sitting, an easy win for businesses.

• The ability to produce cash quickly. Due to their highly liquid nature, marketable securities enable businesses to produce money fast. This is extremely valuable when a potential merger or acquisition opportunity arises unexpectedly. 

Examples of marketable securities

Marketable securities take on many different shapes and forms. Some of the most common examples are as follows.

• Commercial paper is an unsecured, short-term debt issued by corporations. Many companies use commercial paper to help cover short-term liabilities and receivables. Commercial paper may come in handy for funding a new project upfront.

• Treasury bills, also called T-Bills, are short-term debt obligations backed by the U.S. Department of Treasury. T-Bills have maturity periods ranging from a few days to one year. When purchasing a T-Bill, money is lent to the U.S. government to help with debt and cover expenses. The U.S. Department of Treasury pays the total value of the T-Bill by its term.

• Common stock is issued to a company’s shareholders. With stock, shareholders maintain some ownership in the company and often receive voting rights and dividends. 

• Banker’s acceptances or bills of exchange, work similarly to a post-dated check, except a bank guarantees the payment, unlike an account holder with a traditional check. In essence, the bank guarantees payment at a later time. 

• Bonds are a common form of marketable securities. Bonds are issued by a company or government with a fixed rate of return and allow businesses to borrow funds from investors. They are also traded on the open market.

• Preferred shares are shares with a fixed dividend. Payment takes priority over common share dividends. Preferred shares possess qualities of equity and debt.

• Exchange-traded funds (ETFs) enable investors to buy and sell assets and commodities on a stock exchange, exactly like a regular stock transaction. 

Marketable securities vs. non-marketable securities

To fully understand marketable securities, it's important to know how they differ from non-marketable securities.