What Are Marketable Securities

What Are Marketable Securities

Let me explain marketable securities to you directly: these are liquid financial instruments you can quickly turn into cash at a fair price. Their liquidity stems from maturities usually under one year, and buying or selling them doesn't drastically affect their prices.

Key Takeaways

You need to know that marketable securities are assets you can liquidate to cash fast. These short-term securities trade on public stock or bond exchanges, mature in a year or less, and can be debt or equity. Examples include common stock, Treasury bills, and money market instruments.

Understanding Marketable Securities

Businesses keep cash reserves to act quickly on opportunities like acquisitions or unexpected payments, but I advise against letting all that cash sit idle without earning interest. Instead, invest part of it in short-term liquid securities so you earn returns, and if cash is needed suddenly, you can liquidate them easily. Marketable securities fit this role perfectly.

By definition, these are unrestricted financial instruments traded on public stock or bond exchanges, classified as either equity or debt securities. They require a strong secondary market for quick transactions and accurate pricing. Expect low returns because they're highly liquid and safe.

Special Considerations

When analysts evaluate a company or sector's liquidity ratios, they factor in marketable securities to see how well short-term obligations can be met. These ratios check if a company can pay debts using its most liquid assets.

Take the cash ratio: it's the market value of cash and marketable securities divided by current liabilities. Creditors like this above 1, meaning the firm could cover all short-term debt immediately, though most companies keep it low since heavy investment in these isn't highly profitable.

The current ratio divides current assets, including marketable securities, by current liabilities to measure debt-paying ability with all current assets.

The quick ratio uses only quick assets—those easily converted to cash, like marketable securities—divided by current liabilities for a stricter liquidity view.

Types of Marketable Securities

Let's break down the types. First, equity securities: these are common or preferred stock of a public company held by another firm, listed on the balance sheet. If you expect to liquidate or trade within a year, classify as current asset; otherwise, non-current. Value them at the lower of cost or market.

Note that if you're investing to acquire or control another company, these aren't marketable equities but long-term investments.

Then, debt securities: these are short-term bonds from a public company held by another, treated like cash alternatives with a strong secondary market essential. Hold them at cost as current assets until sold, realizing gains or losses then. If holding longer than a year, classify as long-term investments.