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Marketable Securities



Definition

Marketable securities are highly liquid financial assets that can be easily converted into cash within a year. These can include stocks, bonds, or short-term debt instruments such as Treasury bills, which are purchased with the aim of short term profit generation. They are usually listed on public exchange, making them easy to buy or sell without affecting their price.

Phonetic

“Marketable Securities” in phonetics is: /ˈmɑːrkɪtəbl sɪˈkjʊrɪti:z/

Key Takeaways

<ol><li>Marketable securities are easily convertible to cash: They are liquid assets that are bought or sold on public exchanges. As such, they provide companies with the flexibility of converting them into cash quickly. </li><li>Ideal for short-term investments: Marketable securities are often considered an ideal choice for short-term investments. These assets allow companies to earn interest rather than leaving excess cash idle. </li><li>Types of Marketable Securities: These include Treasury bills (T-bills), commercial paper, certificates of deposit, and short-term government bonds. The low risk and liquidity associated with these instruments make them attractive options for investors. </li></ol>

Importance

Marketable securities are significant in business and finance due to their liquidity and revenue generation potential. As highly liquid assets, they can be readily converted into cash, helping companies to meet their short-term obligations and maintain financial stability. These securities can include stocks, bonds, or treasury bills, which can be traded in public markets. Additionally, they provide businesses with an avenue to earn interest or dividend income, contributing to overall profitability. Therefore, the ability to understand and manage marketable securities is crucial in both maintaining financial fluidity and leveraging investment opportunities for businesses.

Explanation

Marketable securities primarily serve as an investment vehicle for entities, enabling them to earn revenues through interest and dividends. Businesses and individuals typically invest in these liquid assets due to their short-term maturity dates that make them a relatively low-risk investment. These include treasury bills, government bonds, corporate bonds, common stocks and preferred shares. Since they can be conveniently bought or sold on public exchanges, marketable securities offer an accessible option for entities looking to quickly convert their investment into cash, thus enhancing their liquidity position.Moreover, marketable securities play an essential role in helping a business manage its cash flow effectively. Instead of letting excess cash sit idle, a company may choose to invest in marketable securities, where it can generate additional income. For instance, if a company foresees a surplus of cash that will not be needed for operational expenses or capital expenditures in the near future, they may choose to invest in these securities with the intention of earning interest or potential capital gains. Therefore, marketable securities offer an effective way of maximizing return on idle cash while maintaining easy liquidity.

Examples

1. U.S. Treasury Bills: U.S. Treasury bills (or T-bills) are a common type of marketable securities issued by the U.S. government. These are short-term obligations that mature in one year or less from their issue date and considered very liquid because they’re easily sellable on the open market. They can be quickly sold to raise cash, making them helpful tools for companies requiring short-term liquidity.2. Commercial Paper: Commercial paper is an unsecured, short-term debt instrument issued by corporations, typically for the financing of accounts receivable, inventories and meeting short-term liabilities. Corporations with high credit ratings use commercial paper to get money to run their businesses, often to fund their day-to-day operations. These papers, due to short maturity period, provide a high level of liquidity, often considered as marketable securities.3. Stocks and Bonds: Stocks and bonds issued by corporations and government bodies alike are also considered marketable securities. Publicly traded company’s stocks can be easily bought or sold on stock exchanges, and are thus highly liquid. Similarly, bonds too can be sold on the open market till its maturity, making them a viable marketable security. These allow companies or individuals to convert their investment into cash whenever they need funds.

Frequently Asked Questions(FAQ)

What are Marketable Securities?

Marketable securities are liquid financial instruments that can be converted quickly into cash, typically at their fair market value. They often include bonds, stocks, or short-term debt securities, which can be bought or sold through public exchanges or over-the-counter markets.

What are the types of Marketable Securities?

The main types of Marketable Securities include Treasury Bills, Government Bonds, Common Stock, Preferred Stock, and Commercial Papers.

How are Marketable Securities classified?

Marketable securities are classified into two broad categories, namely equity securities such as stocks, and debt securities like bonds and treasury bills.

Why do companies invest in Marketable Securities?

Companies often invest in Marketable Securities as a way to earn profits from their excess cash. Yet, they’re also utilized to ensure liquidity, allowing the company to have quick access to cash if needed without tying up their money in less liquid assets.

How are Marketable Securities reported on a balance sheet?

Marketable securities are reported as a current asset on a company’s balance sheet. They are usually listed at their current market value.

Are Marketable Securities considered a safe investment?

The level of risk associated with Marketable Securities depends largely on the specific security. While traditionally they are considered safe investments, market volatility can still affect their value. Investors should thoroughly research and consider the potential risks and returns of the securities they are considering.

What is the difference between Marketable and Non-marketable Securities?

Marketable securities are easily converted into cash because they are bought or sold on public exchanges or over-the-counter markets. Non-marketable securities, in contrast, can’t be bought or sold on the open market; examples include savings bonds and certain types of preferred stock.

How is the value of Marketable Securities determined?

The value of Marketable Securities is based on their current market price. This value can fluctuate based on supply and demand, investor perceptions, and market conditions.

Related Finance Terms

  • Liquidity
  • Asset Diversification
  • Short Term Investments
  • Financial Markets
  • Capital Appreciation

Sources for More Information


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