Marketable securities are financial instruments that can be quickly converted into cash and are highly liquid. These securities are typically short-term investments that businesses and investors frequently use to manage liquidity. Common examples include government securities, banker’s acceptances, and commercial paper.
Definition and Types of Marketable Securities
Definition: Marketable securities are assets on a corporation’s balance sheet that are easily sold and converted into cash. These instruments are typically categorized as short-term investments because they are expected to be liquidated into cash within a year or less.
Types:
- Government Securities: These include Treasury bills, bonds, and notes issued by the government. They are considered very safe due to government backing.
- Banker’s Acceptances: These are short-term credit investments created by non-financial firms and guaranteed by a bank. They are often used in international trade.
- Commercial Paper: This is an unsecured, short-term debt instrument issued by corporations to finance their accounts payable and inventories.
Historical Context and Applicability
Historically, marketable securities have played a crucial role in managing corporate and personal finances, particularly in ensuring liquidity. During times of economic uncertainty, businesses and investors tend to increase their holdings of marketable securities to ensure quick access to cash.
Marketable securities are used in various scenarios:
- Corporate Finance: Businesses maintain a portfolio of marketable securities to manage liquidity, meet short-term obligations, and earn returns on idle cash.
- Investment Strategy: Investors hold marketable securities to park funds temporarily while awaiting better investment opportunities.
Examples of Marketable Securities
Consider the following examples to understand how marketable securities work:
Example 1: A company might hold Treasury bills in its portfolio to ensure that it can meet any unexpected financial needs. These bills are short-term Government-issued instruments that mature in one year or less.
Example 2: An import-export business could use banker’s acceptances to guarantee payments in international trade, thereby making the transaction secure and leveraging its liquidity.
Related Terms
- Liquidity: The ease with which an asset can be converted into cash without affecting its market price.
- Short-Term Investments: Investments that are expected to be converted into cash or be usable within a year.
- Treasury Bills (T-bills): Government debt securities with a maturity of one year or less offered at a discount from the face value.
FAQs
Why are marketable securities important for businesses?
What factors determine the liquidity of a security?
Are marketable securities risk-free?
References
- Brealey, R. A., Myers, S. C., & Allen, F. (2020). Principles of Corporate Finance. McGraw-Hill Education.
- Fabozzi, F. J. (2015). Bond Markets, Analysis and Strategies. Pearson Education.
Summary
Marketable securities are liquid financial instruments that businesses and investors use to manage their short-term cash needs. These assets are easy to sell and include government securities, banker’s acceptances, and commercial paper. Their role in corporate finance is vital for maintaining liquidity and earning returns on short-term funds, making them a significant component of a well-diversified financial strategy.
