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.
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.
Some of the primary features of marketable securities have been discussed below:
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.
The several types of marketable securities are listed below:
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:
|Cash and Cash Equivalents||xxx||xxx|
|Marketable Securities||30, 00, 000||45, 00, 000|
These marketable assets will be included in cash equivalents when they get liquefied.
There are several advantages of investing in short-term marketable assets:
Marketable securities also pose risks that should not be avoided:
Here are some points that you should keep in mind before dealing with marketable securities:
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.
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.
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