Marketable Securities

Marketable securities are versatile financial instruments issued by corporations and governments to raise capital swiftly for operational needs and expansions. These securities, which include both equity and debt forms like T-bills, are highly liquid, enabling quick conversion into cash within a year.

Businesses strategically invest in marketable securities to optimise cash holdings, aiming for short-term returns while maintaining financial flexibility. This liquidity and profitability make marketable securities a favoured choice in corporate finance and government funding strategies.

In this article, we will learn what marketable securities are, their types, why people invest in them, and their characteristics and examples.

​​What are marketable securities?

Marketable securities are popular as some of the most liquid financial instruments. They can easily be converted to cash within a year of investment. They can be issued as equity or debt securities for publicly listed companies.

For example, a business which wants to raise capital for its operational expenses or expansion projects will issue marketable securities. An investor or company that buys these securities does so to generate short-term earnings with the cash at hand.

Besides private companies, governments can also issue securities in the form of debt like Treasury bills, which are used to fund large-scale projects or meet government expenses.

Types of marketable securities

Marketable securities can be divided into two types:

1. Marketable equity security

Marketable equity securities, such as preferred stock or common stock, are the equity securities of publicly traded companies that are shown on the balance sheet of the holding company or corporation.

If the holding company liquidates the stock within a year of purchase, it will be treated as a current asset. However, if it is held for more than a year, it is treated as a non-current asset.

If the equity of a business is bought with the aim of either acquiring a stake or controlling the business, it is considered a marketable equity security and treated as a long-term investment.

2. Marketable debt security

Any short-term bond of a public company held by another company is considered a marketable debt security. A company holds marketable debt securities as current assets on its balance sheet.

Since these are short-term investments, they are expected to be sold within a year. If held beyond this period, marketable debt securities are termed long-term investments. All marketable debt securities are recorded at cost on a company's balance sheet as current assets until they are sold, at which point, any gain or loss is recognised.

Purpose of investing in marketable securities

Here are three main reasons why businesses invest in marketable securities:

1. Held until maturity

The marketable securities of a company are held till the date of maturity. If this date is within a year, these investments fall under short-term investments. However, if the maturity date is over a year, they are classified as non-current assets held as long-term investments.

They are mentioned in the balance sheet of the company at their fair value, and ups and downs or price fluctuations are omitted. If any gains or losses are realised, they are listed in the balance sheet.

2. For trading

The main reason why businesses buy marketable securities is to earn short-term profits, which are typically held for less than a year.

The securities are listed at their fair value on the balance sheet, and if any losses or gains occur during the holding period, these fluctuations are also recorded. Any such temporary fluctuation becomes a part of the income statement.

3. For sale

If the purpose of purchasing the security is not trading or staying invested in it till maturity, they are bought with the intention to sell. The marketable securities are listed at fair value without realising profits or losses.

However, if the changes appear to be permanent, the fair value must be reflected on the balance sheet and accounted for in the profit and loss statement.

Characteristics of marketable securities

Marketable securities are quite popular with some investors since they have a short maturity horizon, which is less than a year. As a result, converting them to cash is way easier than any other long-term security.

Marketable securities have the following characteristics:

• They come with a maturity period of less than a year

• They can be easily bought and sold on public stock or bond exchanges.

• They also have a strong secondary market, which makes buying and selling easy, and they have accurate price valuations for investors.

• They offer higher liquidity, which also reduces the risk.

• They are not considered cash or cash equivalents, such as money market securities due within 3 months.

Why invest in marketable securities?

When a company generates extra funds in the form of cash, there is always inflation risk, because of which the cash lying idle will lose its value. So as a better alternative, this cash is used to buy marketable securities that come with low risk, provide decent returns, and can be liquidated easily.

Let us take the example of a company, XYZ Pvt. Ltd., which generated surplus cash flows of Rs. 2 crore that are not immediately required. If the company lets this cash sit idle at a 4% inflation rate, its real value will decrease to Rs. 1.92 crore by the end of the year.

However, on the other hand, if the company decided to invest this money in 364-day Treasury Bills, it would generate a return of 4.5%. The cash would be worth approximately Rs 2.01 crore after considering inflation.

If the company requires the money a few months down the line, it can easily sell the T-Bills in the secondary market. However, there is a chance that the T-Bills will fetch a lower rate than if they had been held until maturity.

Examples of marketable securities

Here are some examples of marketable securities:

​​Government paper

Also known as Treasury Bills or government securities, government paper is highly liquid and can easily be converted to cash. It has a very low risk profile and is also easily traded on the secondary markets.

Commercial paper, corporate bonds, and debentures

Commercial papers are securities issued by companies as short-term instruments to raise funds. Corporate bonds and debentures are more long-term in nature. Commercial papers mature mostly within a year and hence fall under marketable securities.

Certificate of deposits

Issued by banks, these financial instruments come with a short-term maturity and can also be traded on secondary markets, which qualifies them as marketable securities.

Mutual funds

Most mutual fund scheme units can be redeemed quite easily, and their market price gives their present value at any given point in time, categorising them under marketable securities.

Key takeaways

• It is easy to liquidate marketable securities assets into cash.

• Marketable securities are short-term financial instruments that can easily be traded, purchased, or sold through public stock or bond exchanges.

• These securities can either be equity or debt and mature within a year or sometimes sooner.

• Treasury bills, money market instruments, and common stock are all assets that come under marketable securities.

Conclusion

Marketable securities provide an excellent way to judiciously use idle cash that is not immediately useful. They are also easy to convert to cash or other liquid assets, making them a popular investment choice for many.

However, they do not generate significant returns since they are low risk, held for a short period, and are not necessarily profit-making. Marketable securities provide an effective way to manage your cash flow.

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