Marketable Securities – Why Should You Invest in Them
Marketable securities are highly liquid short-term assets that an organisation can readily convert into cash. Some examples of marketable securities include commercial papers, treasury bills, stocks, ETFs and other types of money market instruments.
These securities are also a classification term for tradable market instruments, which can either be debt or equity securities. Read on to learn about the importance of marketable securities, their features, types and examples and why you should consider investing in them.
Importance of Marketable Securities in Balance Sheet
Business organisations have a cash reserve that keeps them ready for unforeseen cash challenges that may occur in the future. However, these reserves in liquid form are reduced by inflation over time.
On the other hand, some investment vehicles earn interest on the principal amount but have fixed maturity periods which restrict the companies from accessing the funds when necessary.
Marketable securities allow organisations to invest in low-risk market assets with high liquidity and fixed returns. It allows them to expand their reserve but access it whenever necessary.
What Are the Features of Marketable Securities?
Some of the primary features of marketable securities have been discussed below:
- High Liquidity: Liquidity is the prime feature of these securities. This particular characteristic attracts business organisations to invest parked funds into marketable securities.
- Low Returns: As these investments are frequently traded in large numbers due to their easy liquidity, they yield low returns.
- Fixed Returns: These securities offer fixed returns to the investors, unlike several assets of other kinds.
- Short Maturity Period: The maturity period for these assets is usually one year.
- Highly Tradable: Marketable securities can be easily bought, sold or traded on exchanges.
Classification of Marketable Securities
In accounting terms, marketable assets are current assets, usually liquidated within a year. Companies classify marketable assets on a balance sheet into two primary categories.
- Debt Securities: Short-term bonds issued by a public company are referred to as marketable debt securities. These securities are expected to be sold within a year.
- Equity Securities: Common stock or preferred stock of a public company that is expected to be traded or liquidated within a year are referred to as equity-oriented marketable securities.
What Are the Types of Marketable Securities?
The several types of marketable securities are listed below:
- Bonds: Marketable debt securities are a popular form of investment vehicle. Issuing companies sell these bonds to raise temporary funding for business expenses.
- Commercial Papers: These are highly liquid assets with a maximum maturity period of 270 days. It is typically issued by companies to finance short-term liabilities.
- Stocks: These are equity investments that can be traded on the stock exchange. Investing in stocks also gives the investors partial ownership of the issuing companies.
- Treasury Bills: These are assets issued at discounts and yielded at face value, which help to earn stable returns for investors. These are instruments of the government securities market.
- Exchange Traded Funds (ETFs): ETFs are like mutual funds, but ETF units can be traded like shares on the exchange. Just like a mutual fund, ETF pools money from multiple investors and the fund manager allocates the assets as per his/her investment objective.
- Preferred Shares: This type of stock holding offers the benefits of both shares and bonds. Like bonds, they offer fixed dividends to common shareholders. However, bondholders are prioritised over preferred shareholders.
Examples of Marketable Securities in Balance Sheet
Marketable securities are classified as debt and equity assets under the current assets head on a company balance sheet. It can be better demonstrated with a marketable security example.
Let’s say an organisation known as ABC Chemicals has invested its cash reserve in bonds, shares and ETFs for the years 2021 and 2022. Their marketable securities for 2021 were valued at Rs.30,00,000. For the year 2022, the value increases to Rs.45,00,000 as on 31st July 2022.
The value of the marketable securities will be reflected on the balance sheet of the company in the following way:
| Particulars | 2021(Rs) | 2022(Rs) |
| Current Assets: | ||
| Cash and Cash Equivalents | xxx | xxx |
| Marketable Securities | 30, 00, 000 | 45, 00, 000 |
| Inventories | xxx | xxx |
| Non-Current Assets: | xxx | xxx |
| Total Assets | xxx | xxx |
These marketable assets will be included in cash equivalents when they get liquefied.
What Are the Advantages of Investing in Marketable Securities?
There are several advantages of investing in short-term marketable assets:
- Dissolving Short-term Liabilities: The liabilities of a company are distributed under current and non-current liabilities heads on a company’s balance sheet. Short-term liabilities can be dissolved by liquidating these assets on their due dates.
- Liquidity Ratio Analysis: Experts often use marketable securities to analyse liquidity ratios, which helps to determine an entity’s financial standing.
- Effective Substitute to Cash: Marketable securities are beneficial alternatives to hard cash, and they also fetch returns, unlike parked cash at the bank.
- Liquidity Value: This feature allows companies to maintain a decent liquidity ratio and avoid the risk of low liquidity.
- Regulatory Benefits: By investing in highly liquid securities, companies maintain safe liquidity access, which helps them to adhere to certain regulations.
What Are the Disadvantages of Marketable Securities?
Marketable securities also pose risks that should not be avoided:
- No Access to Hard Cash: Marketable securities have high liquidity, but it is not the same as cash in hand. There is a minimum period till which you cannot liquidate a marketable security.
- Risk of Default: Despite the contract, a bond issuer may fail to pay the interest amount on the expected date, which could affect the business and plans of the investor.
- Difficult to Record and Track: It can be hard to track the different maturity dates of multiple marketable debt securities at the same time. Hence, it is also difficult to match the expiry dates to the due dates of the short-term liabilities of an organisation.
- Inflation: Inflation affects the expected returns from marketable securities like everything else in an economy.
- Minimum Value Risk: Some marketable securities may require a minimum value investment. However, all companies might not be able to afford investing a fixed amount in a particular security. This restricts companies from investing in highly-liquid assets and missing out on potential returns.
Things You Need to Know About Marketable Securities
Here are some points that you should keep in mind before dealing with marketable securities:
- It is considered an asset under the current assets head on a company’s balance sheet.
- These assets are an advantage when it comes to liquidity.
- Marketable securities are not safe from inflation; however, it gives effective returns.
- It is a productive alternative to hard cash.
Final Word
Marketable securities are cash alternatives that earn short-term low returns and can be easily converted to cash. When purchased by companies, these are recorded as current assets in the company balance sheet. Investors who wish to avoid long-term or riskier investments can consider investing in short-term marketable securities.
FAQs
Ans: Marketable securities cannot be listed under cash and cash equivalents as their maturity is over 3 months or 90 days, and they are in the form of shares, bonds, etc.
Ans: Market securities are bought and sold on public stock and bond markets. The maturity period of marketable bond securities should be less than 1 year. Additionally, stocks that can be easily traded on an exchange are considered to be marketable security.
Ans: No, marketable securities are denoted as current assets on a company’s balance sheet, meaning the maximum maturity period can be 1 year. However, they can also have a shorter maturity, like 270 days.
Ans: Marketable securities are a collection of short-term assets of a company; hence, they are also called equity securities. However, they are mostly mentioned as short term assets in the accounting books.
Ans: No, marketable securities are current assets of a company with high liquidity and low returns. The reserved cash of a company gets converted into marketable securities, which is why they are considered as assets and not liabilities.
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This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
