Marketable securities management is an essential process in contemporary companies and government agencies. Corporate treasurers always search for ways to boost the return on their liquid cash. They know that cash set aside for precautionary purposes will not earn anything. In these situations, companies can gain profit from it by investing in high-liquid and low-risk marketable securities.
Let’s look at marketable securities’ meanings and types of marketable securities.
What are Marketable Securities?
Marketable securities are highly-liquid financial assets that can be sold or converted into cash easily within a year after purchase. These securities are issued by businesses to raise funds for operating expenses or business expansion. At the same time, a company invests in marketable securities to gain short-term income with the available cash in hand.
Characteristics of Marketable Securities
Some investors are more eager to grab this type of investment because the maturity periods are typically less than a year. Following are some marketable securities characteristics:
- One-year or lesser maturity period.
- Can buy or sell on a public stock exchange or a public bond exchange.
- The higher liquidity effectively mitigates the risk.
The suitability of investments in marketable securities depends on the investment strategy of the individual investor or company. Marketable securities will always gain low returns compared to long-period investments.
Marketable securities are generally classified as either marketable debt securities or marketable equity securities.
| Debt securities | Equity securities |
| It is a debt instrument bought or sold between two parties. Basic terminologies in debt securities include the amount borrowed, interest rate, maturity period, and renewal date. | Equity security is an ownership interest held by shareholders in a company, partnership, or trust. In other words, they are financial assets that represent shares of a company. |
| Examples: Government bonds, corporate bonds, certificates of deposit (CD), and municipal bonds. | The general type of equity security is common stock. |
Types of Marketable Securities
1. Stocks
Stock, which is an equity security, gives stockholders ownership in a company. They are purchased by investors for a variety of reasons, such as capital appreciation. Also, investors can get dividend payments when a company distributes some of its earnings to stockholders.
Two types of stocks
- Common stocks
- Preferred stocks
How do preferred stocks and common stocks differ?
Preferred stocks or preferred shares have unique characteristics that set them apart from common stocks.
- Holders of these preferred stocks have a preference over common stockholders in claiming the company’s assets in the event of a liquidation.
- Preferred stocks provide dividend payments to shareholders. These payments are fixed or floating, based on an interest rate benchmark such as LIBOR.
- Preference shareholders do not have voting rights. (rights to vote on company’s official matters)
2. Bonds
Bonds are debt securities that are issued by companies or governments. Borrowers issue bonds to raise money for company operations from investors willing to lend them for a certain amount of time. Here, the issuer promises to repay the principal, also known as face value or par value, and a specified rate of interest during the life of the bond.
A bond’s market value changes over time as it looks more or less attractive to buyers. They generally offer lower interest rates, and they have shorter maturities. Borrowers have to pay periodic interest payments, usually twice a year.
In fact, bonds issued by organizations will not give an ownership right to investors. So they don’t benefit from the company’s growth and won’t see impacts when the company is not doing well as well.
Some bond terms:
- The interest rate paid by the bond is referred to as “a coupon.”
- “Yield” is a method of calculating interest that accounts for the bond’s fluctuating value. The simplest way to calculate yield is the coupon divided by the current price.
- “Face value” is the bond’s worth when it is issued. The “par” value is another name for this.
- The “price” of a bond refers to how much it would cost on the secondary market right now.
- “The maturity date” is the day on which the issuing entity must return the bond’s full par value.
3. Exchange-Traded Funds (ETFs)
Exchange-Traded Funds, a popular choice of investment diversification, are a group of different securities such as bonds, shares, money market instruments, etc., and they can be traded on public exchanges. They combine the exceptional features of two widely used financial assets: mutual funds and stocks. In terms of structure, regulation, and management, ETF funds are similar to mutual funds.
Types of Exchange-Traded Funds (ETFs)
- Bond ETFs – give exposure to a variety of bond kinds.
- Currency ETFs – allow investors to participate in currency market transactions without purchasing a specific currency.
- Inverse ETFs – The share prices of these funds move in the opposite direction of the inverse ETFs’ share prices.
- Liquid ETFs – minimize price risks and enhance returns by investing in a basket of short-term government securities.
- Gold ETFs – allow investors to hold claims in the bullion market without purchasing physical gold.
4. Other Marketable Securities
Money market instruments, derivatives, and indirect investments are some more examples of marketable securities. Money market securities (Treasury bills, banker’s acceptances, purchase agreements, and commercial paper) are the most reliable liquid securities and are purchased in vast quantities by large financial entities.
Role of Marketable Securities in Accounting
In accounting, marketable securities are considered as current assets. It is included in the working capital calculations in the company’s balance sheets. If a corporation plans to keep the security for more than a year, it will be classified as a non-current asset. Furthermore, if a corporation holds the equity of another company to acquire it, the shares are not considered marketable equity securities. Rather, they are listed as a long-term investment by the corporation. Similarly, if a firm intends to maintain debt security for more than a year, it must be recorded as a long-term investment on the balance sheet.
The Bottom Line
The predominant characteristic of marketable securities is their liquidity. These securities can be made liquid by their relative supply and current demand in the market. Marketable securities typically have a lower rate of return than least liquid assets (Land, real estate, or buildings ), but they can be sold quickly with price quotes available instantly and perceived as lower risk as well.