What are Marketable Securities?

What are Marketable Securities?

Marketable securities are short-term financial instruments issued in the form of equity securities or debt securities. They are mostly associated with a publicly listed company and can help you raise funds for business operations and expansions. Governments also issue these debt securities in the form of treasury bills, which are used to fund public projects and expenditures.

Features of Marketable Securities

Some investors prefer marketable securities as investments because they have a short maturity period (less than one year). Converting or liquidating these investments into cash is easier than any other longer-term securities.

Marketable securities are generally characterised by:

• A maturity period of one year or less
• The ability to be bought or sold on a public stock exchange or public bond exchange
• A strong secondary market, which supports liquid buy and sell transactions and enables accurate price valuation
• High liquidity, which helps reduce risk
• Not being classified as cash or cash equivalents, such as money market securities, due within three months

The suitability of investing in marketable securities depends on the investment strategy of the investor or the firm. These securities generally offer lower returns compared to longer-term or open-ended investments such as stocks. As they are held for a year or less, marketable securities carry lower maturity and liquidity risk.

Accounting for Marketable Securities

Short-term liquid securities are classified differently for accounting purposes, based on the intent for which they are purchased.

There are three classifications of marketable securities:

• Available for sale
• Held for trading
• Held to maturity

These classifications depend on specific criteria, as well as the historical transaction patterns followed by the investor or firm in past accounting practices.

Types of Marketable Securities

Marketable securities are highly liquid assets that can be easily converted into cash. Some common types include:

• Stocks: Shares of that can be bought and sold on stock exchanges and are a part of publicly traded companies
• Bonds: Debt securities issued by governments or large corporations that are traded in bond markets
• Treasury Bills (T-bills): Any short-term government security with less than one year of maturity
• Exchange-traded funds (ETFs): Pooled investment vehicles whose shares are traded on stock exchanges
• Commercial paper: Short-term debt instruments that help you meet some immediate financing needs
• Certificates of deposit (CDs): Time deposits offered by various banks across regions with maturity dates and fixed interest rates
• Futures: Derivative contracts used to trade physical assets, speculate, or hedge price risk
• Options: Derivative instruments where two parties agree to transact an asset at a predetermined price before or on the expiry date

Purpose of Investing in Marketable Securities

Businesses invest in marketable securities for one of the following reasons. Based on the purpose of the investment, the accounting treatment differs.

Held Until Maturity

Companies hold these securities until their maturity date. If the maturity date is within one year, the investment is classified as a short-term investment. If the maturity date exceeds one year from the purchase date, it is classified as a long-term investment and recorded as a non-current asset. You can easily find the fair value in the balance sheet. However,  temporary market fluctuations are usually ignored. Any realised gains or losses are recorded in the balance sheet.

For Trading

Organisations usually purchase these securities to generate short-term profits. That is why they are generally held for less than one year. The fair value of the holdings is reported in the balance sheet. People also record the gains or losses during the holding period. Temporary market fluctuations are always recognised in the income statement.

For Sale

If securities are not purchased for trading or to be held until maturity, they are classified as available for sale. They are recorded at fair value in the balance sheet along with unrealised gains or losses. Unlike trading securities, temporary gains and losses are not required to be reported in the income statement.

Advantages and Disadvantages of Marketable Securities

Let us take a closer look at the advantages and disadvantages of marketable securities.

Advantages:

• Liquidity: You can easily convert these holdings into cash. Hence, they help manage the flexibility in terms of financial obligations.
• Income generation: They allow companies to earn returns on their cash reserves. As a result, these securities help with low-interest-rate environments.
• Risk management: They can easily help you manage short-term financial risks and meet unexpected cash requirements.

Disadvantages:

• Market risk: The value of marketable securities can often fluctuate based on market conditions.
• Limited returns: The returns provided by these securities may be lower than other long-term investments.
• Short-term focus: They are not suitable for any other long-term investment strategies because they have short maturities. 

Understand Marketable Securities

Marketable securities are excellent liquid assets because they can be easily converted into cash without loss of value. Most organisations prefer to convert these current assets into cash within 12 months. These securities include commercial paper, stocks, bonds, treasury bills, and certificates of deposit.

Marketable securities offer several advantages, such as high liquidity, income generation, and risk management. However, they also have limitations, such as market risk, lower returns, and a short-term investment focus.