What are Marketable Securities?
Are marketable securities current assets?
What are the essential elements you should know!
In this article, we will break down the definition of Marketable Securities so you know all there is to know about it!
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What Are Marketable Securities
Marketable securities are financial instruments that can be readily converted into cash.
In other words, when you invest in “marketable securities”, you are investing in equity or debt assets that are highly liquid and that can be converted into cash in less than a year.
For example, shares of stock that can be easily bought and sold on the stock market can be considered marketable securities.
You can also have debt securities that may be considered as “marketable” when they have maturities coming up within less than a year.
One important reason why companies invest in marketable securities is to avoid holding on to cash.
There are instances when a company wants to hold on to money in a relatively liquid form to plan for an acquisition, purchase a real estate property, or invest in a business project.
Instead of keeping the money as cash in a bank account generating little to no returns, companies invest their money in marketable securities to generate a return and have the assurance that they can quickly convert the investment back to cash as needed.
Marketable Securities Definition
According to Investopedia, the definition of marketable securities is as follows:
Marketable securities are liquid financial instruments that can be quickly converted into cash at a reasonable price.
As you can see from this definition, marketable securities have the following meaning:
- They are financial instruments
- They are convertible into cash
What Are Non Marketable Securities
What are financial instruments that are not marketable securities?
Financial instruments that are not liquidity or have a highly developed secondary market are not marketable securities.
The main characteristic of security considered marketable is their liquidity (the ability to easily buy and sell the asset).
As a result, a security that is not liquid will not be classified as marketable.
Here are the different aspects that you can consider to assess
Marketable Securities Examples
What are some examples of marketable securities?
The most common examples of marketable securities are:
- Common shares
- Preferred shares
- Commercial paper
- Banker’s acceptances
- Treasury bills
- Exchange-Traded Funds (ETFs)
- Indirect investments
- Stock rights
- Hedge funds
- Unit trusts
For a financial asset to be considered as “marketable” securities, it must be liquid, have a secondary market, and readily converted into cash.
Why Marketable Securities Are Important
Marketable securities are very important for companies in the management of their day-to-day business and in the context of the company’s overall business strategy.
The most important reason why companies hold cash and marketable securities is to ensure they have access to liquid money or assets as needed to pay for costs, expenses, and fulfill their financial obligations.
Another important reason to invest in short term marketable securities is to ensure that they earn a better return than keeping their cash uninvested.
By putting cash into marketable securities short term investments, a company is able to have its money earn a return.
Here are some reasons why a company will hold marketable securities on balance sheet:
- Keep cash to pay for short term business debts and liabilities
- Keep a cash reserve for unexpected expenses
- Accumulate liquidity to plan for an acquisition of another business
- Accumulate liquid funds to purchase a capital asset
- Plan for the payoff debt within the next twelve months
Characteristics of Marketable Securities
What characterizes marketable securities?
The main characteristic of marketable security is the ability to convert the asset into cash quickly.
Many marketable securities are traded publicly on stock exchanges or public markets also called secondary markets.
With a highly developed secondary market, you can easily find a buyer willing to purchase your financial asset.
Marketable instruments are generally lower-risk financial investments offering more safety to investors.
In a nutshell, we can summarize the marketable securities features as follows:
- They are instruments that will be converted into cash within a year
- They are generally traded on a public exchange (like the stock market or bond market)
- They are highly liquid
- Their market value is well defined due to their high liquidity
- They are generally investments offering low risk to investors
- They are not cash or cash equivalent investments
Types of Marketable Securities
How many types of marketable securities do you have?
There are essentially two types of securities that may be considered marketable:
- Equity security
- Debt security
Let’s look at each of them.
To understand what is equity security, let’s quickly define what is “security”.
The term security represents a financial instrument having some monetary value.
They are negotiable and fungible.
“Equity securities” represent ownership interests in a legal entity such as a corporation, company, partnership, trust, or other business entity by way of shares.
There are typically two types of equity securities companies issue from their capital stock: common shares and preferred shares.
A company can hold equity securities in other publicly traded companies.
When the holding company’s intention is to liquidate the stock within a year, they will present the marketable equity securities as current assets on their balance sheet (otherwise, they will be classified as non-current assets).
Similarly, debt securities are negotiable financial instruments (or debt instruments) where one party (investor) lends money to the other (issuer).
Said differently, debt securities represent a claim to borrowed funds that must be paid back in accordance with the terms of the debt security agreement.
Companies, businesses, and governments need money to operate.
In some cases, they will choose to finance their operations by borrowing the money.
By issuing bonds or debentures, issuers reach out to investors asking them to lend some money so they can finance their business operations and, in exchange, they promise to repay the face value of the sums borrowed along with a set rate of interest.
Marketable debt securities debt instruments that are either expected to mature within a year or be sold on the debt market.
Bonds, treasury bills, and other types of debt instruments have highly liquid secondary markets where companies can quickly buy and sell their debt instruments.
Marketable Securities On Balance Sheet
In accounting, marketable securities are a company’s current assets.
Generally, marketable securities on the balance sheet are reported under “Cash and Cash Equivalents” within the current asset category.
Are Marketable Securities Current Assets
In general, many marketable securities are classified as current assets.
In essence, marketable securities refer to different types of short-term assets reported by companies as current assets.
Some companies will adopt a more conservative investment approach and invest in safe marketable securities such as treasury bills and safe corporate bonds.
Other companies may want to generate a higher return on their cash and invest in stocks and fixed-income securities.
There’s one exception to this.
If you have marketable security that has a maturity date greater than a year, you will no longer classify it as a current asset but a long-term investment under the non-current asset category.
Accountants and investors can classify marketable securities in different ways based on the purpose for which the instrument was purchased.
You can have the short-term investments marketable securities classified as:
- Available for sale
- Held for trading
- Held to maturity
If you are holding the securities for sale, you are classifying debt or equity securities that are not intended to be traded to earn profit or held until maturity.
If you are holding the securities for trading, you are purchasing the securities for profit and your objective is to sell them within a year.
If you are classifying the investment as held to maturity, you are looking to purchase the investment and hold on to it until it matures.
If the maturities are within a year, then you have short-term investments, if the maturity is over a year, then you have long-term investments.
Marketable Securities In Financial Ratios
Finance professionals use marketable securities in evaluating a company’s financial health and its ability to assume its short-term financial obligations.
There are different types of liquidity ratios that can be calculated where marketable securities are considered as part of the equation.
Let’s go over three types of liquidity ratios where the objective is to assess how well a company can pay for its short-term financial obligations:
- Cash Ratio
- Current Ratio
- Quick Ratio
Let’s look at each of these ratios.
The cash ratio formula is as follows:
CR = MCS / CL
- CR = Cash Ratio
- MVSC = Market Value of Cash And Marketable Securities
- CL = Current Liabilities
When the ratio is above 1, it means that the market value of a company’s marketable securities along with its available cash exceeds the company’s current liabilities.
In other words, the company has the ability to pay all its short-term debt.
The current ratio formula is as follows:
CR = QA / CL
- CR = Current Ratio
- QA = Current Assets
- CL = Current Liabilities
This formula allows you to calculate how well a company is able to pay its short-term liabilities using its current assets.
A company’s marketable securities are part of the current assets.
The quick ratio formula is as follows:
QR = QA / CL
- QR = Quick Ratio
- QA = Quick Assets
- CL = Current Liabilities
The quick ratio is intended to measure how well a company can pay its current debt obligations using quick assets that include marketable securities.
Quick assets are those assets that a company can more easily convert into cash within all the assets classified as current assets.
Marketable Security Takeaways
Are marketable securities current assets?
Are marketable securities short term investments?
What are marketable securities on a balance sheet?
In this article, we have broken down the notion of “marketable securities” so you can understand what it means.
In summary, financial assets that are liquid, low risk, readily traded on public exchanges, and easily convertible into cash are considered “marketable securities”.
Let’s look at a summary of our findings.
Definition Marketable Securities
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