Definition
Marketable securities are easily liquidated financial instruments like stocks, bonds, or debentures that are often purchased for short-term investment purposes. These securities are characteristically low-risk and highly liquid. They are issued either by governments or corporations and can be traded in the secondary market with ease.
Key Takeaways
- Marketable securities are highly liquid financial instruments. They can be quickly bought or sold with little impact on their price, offering organizations with immediate cash, which can enhance their financial stability.
- Marketable securities are generally categorized as short-term investments, as they are typically bought with the intent of being held for one year or less. This includes U.S. government bonds, municipal bonds, corporate bonds, and stocks.
- Their value is based on market conditions, so there is a degree of risk involved. While they offer the potential for returns, their value can also decrease. Companies hence need to manage their portfolios of marketable securities properly to minimize potential risk and maximize return.
Importance
Marketable Securities is an important finance term as it represents liquid assets that a company or individual owns with a purpose of short-term investment.
These assets can be easily and quickly converted into cash at a reasonable price within a short period.
The ease of conversion is crucial for entities to meet their immediate financial obligations without incurring losses.
Marketable securities offer an optimal blend of earning returns on idle cash while still having the flexibility to turn investments back into cash whenever necessary.
Hence, they play a crucial role in cash management and financial planning by ensuring liquidity, returns, and risk mitigation.
Explanation
Marketable securities are highly liquid assets that can be bought and sold quickly. Their importance lies in providing companies or individuals with an avenue to invest surplus cash that they don’t need immediately but might require in the upcoming short term.
These securities, due to their liquidity and safety, offer an alternative to keeping cash idle. They have a significant purpose in portfolio diversification as well, mitigating risks by spreading investments across various types of financial instruments.
Albeit a form of investment, the primary purpose of marketable securities isn’t necessarily to generate high returns but to safeguard liquidity by enabling quick conversion back into cash with minimum risk of losing the principal amount. Companies often use them for managing cash flows efficiently.
Since these are typically low-risk, low-yield, short-term instruments, they also provide an emergency cushion—much needed in the uncertain business world for covering sudden expenses. Additionally, the ease of conversion into cash allows businesses to take advantage of arising investment opportunities thereby facilitating financial flexibility.
Examples of Marketable Securities
Treasury Bills: Also known as T-bills, these are short-term debt securities issued by the U.S. government. They come with maturities ranging from a few days to 52 weeks and are typically considered one of the safest and most liquid investments available.
Corporate Bonds: Large corporations often issue bonds as a way of raising capital. They are essentially IOUs where the company pledges to return capital to investors, with interest, at a set future date. These bonds can often be bought and sold on public markets, thereby giving them the title of ‘marketable securities’.
Common Stock: This is perhaps the most well-known type of marketable security. When an individual buys common shares in a company (for instance, Apple or Amazon), they gain a portion of ownership in that business. These shares can easily be bought and sold on the stock market, making them highly liquid and therefore classed as a marketable security.
FAQs on Marketable Securities
What are Marketable Securities?
Marketable securities are easily liquidable financial instruments that can be converted into cash within a year. These include assets such as stocks, bonds, and short-term debt instruments like Treasury bills.
What is the importance of Marketable Securities?
The primary importance of marketable securities is their liquidity. Companies often invest in these instruments for the short term as they can be easily sold when cash is needed. They also provide an opportunity to earn interest in the short term.
What are examples of Marketable Securities?
Examples of marketable securities include government bonds, municipal bonds, corporate bonds, Treasury bills, common stock, and commercial paper.
How are Marketable Securities classified?
Marketable securities can be classified into three categories: Marketable equity securities, marketable debt securities, and money market instruments. The classification is based on the nature of the security and its intended use by the investor.
Are Marketable Securities considered cash?
While marketable securities are not cash, they are often listed under cash and cash equivalents on a company’s balance sheet due to their high liquidity and short-term maturity.
Related Entrepreneurship Terms
- Liquidity
- Short Term Investments
- Treasury Bills
- Commercial Paper
- Money Market Funds
Sources for More Information
- Investopedia: A comprehensive financial education website that offers articles on most financial topics including Marketable Securities.
- Fool.com (The Motley Fool): A financial and investing advice company that provides a range of financial solutions, including information about Marketable Securities.
- Corporate Finance Institute (CFI): A leading provider of financial analyst certification programs, CFI provides extensive information about financial concepts such as Marketable Securities.
- Fidelity: A financial services corporation that offers a range of resources on financial topics, including Marketable Securities.
