What do you mean by marketable securities?

A financial security refers to a broad category of any form of a  tradable financial asset. The value of an asset is derived from the money and/or work of someone else. For example, a stock, because it’s value accrues from the laborers of the company.

Marketable securities are short term (less than a year) financial instruments that can be readily converted to cash. The ease with which these securities can be redeemed for cash is where lies the secret sauce and makes them popular amongst investors. They are relatively compared to other financial assets fixed in long term positions because they can be liquidated very easily within a year without any restriction. This is a financial product and is intangible in nature. For example, a barrel of oil would not be considered a security but an ownership stake in an oil mill would.

Types of Marketable Securities:

1. Marketable Debt Securities:

Corporate and government bonds are the most common forms of marketable debt securities. Bonds are fixed-income instruments that can be easily traded in the market and they have a readily available market price. They allow the bond issuers to quickly raise some capital. The bearer of the bond is guaranteed a fixed rate of return called the coupon rate, like receiving interest in giving a loan.

A bond is a token that acknowledges the debt owed by the borrower to the lender, loosely speaking an IOU. Governments and corporations can quickly issue bonds to raise money to meet some urgent requirement of funds. When these marketable debt securities are held for less than a year they are listed as current assets in the balance sheet and on the maturity date, the issuer repays the full par value of the bond.

2. Marketable Equity Securities:

Marketable equity securities include common and most preferred stock. They too can be very easily traded in the market and the information about their market price is readily available. The company can use the shareholders’ investment as equity capital to fund their operations and meet short term liabilities.

In the case of common stock, the shareholder receives certain voting rights and periodic dividends. Investing in stocks can be risky and hence the relevant risk and reward balance needs to be weighed in. For preferred shareholders, they cede the voting rights the common stockholders enjoy, and in return, they enjoy the guaranteed dividend, and in case that the company is to be liquidated, the preferred shareholders enjoy higher claims on those funds.

Some other marketable securities are:

1. Exchange-Traded Funds: A publicly traded investment fund that is a collection of securities like stocks, commodities, or bonds.
2. Money Market Instruments: They are short term bonds. Like T-bills (issued by the govt.), Certificate of Deposits (CDs), commercial paper, banker’s acceptances, and purchase agreements.
3. Derivatives: They are investments whose value directly depends on other securities, some derivatives as futures, options and stock rights and warrants. 

Why do they matter and how can they save you in unsure waters?

Keeping cash idle is as good as making a loss, and money in savings accounts may not yield much interest either. Companies hold some cash in their reserves to prepare for unexpected situations, it is a good idea to invest in marketable securities which offer good returns and also the safety of the investment. Because they can be liquidated so easily, often that money is used to pay any short term liability.

From the accounting perspective, marketable securities are an important parameter when an analyst conducts liquidity ratio analysis This yields important information when understanding a company’s short term financial standing to understand how can the company handle any unexpected financial requirements and to assess the liquidity position in case of any solvency issues that may exist.