Marketable securities are securities that can be sold in a short time without losing the principal or initial investment. The maturity is usually more than 90 days but less than one year. In the financial balance sheet, the company reports them as a current asset because they are liquid and easily converted to cash.
In the most liquid order presentation, they are under a cash and cash equivalent account and before accounts receivable and inventories. Cash equivalents differ from marketable securities, where cash equivalents usually have a maturity of 3 months or less. In contrast, marketable securities may have a maturity of up to 12 months. Also, cash equivalents have tighter liquidity requirements.
Because liquid companies expect to convert them into cash shortly, usually one year. Following conservative accounting practices, reporting in the balance sheet is carried out using the cost or market value method, whichever is lower.
Examples and features of marketable securities
Examples are government bonds, treasury bills, corporate bonds, mutual funds, and stocks. They usually:
- Very liquid in a sense, companies are easy to buy and sell in the public market
- Having an active secondary market, making them actively traded
- Easily transferred on the stock exchange or vice versa.
- Offer a low rate of return
- Non-cash equivalents (i.e., securities that have a maturity of less than 3 months)
Companies often invest in these instruments because they are relatively safe and liquid. They are listed on public markets such as the stock exchange, and there are many buyers and sellers, making them actively traded.
Although the rate of return is low, often, it is higher than bank interest. Therefore, the company allocates money to these instruments as a short-term investment.
Such investments help companies in situations when they need cash in the future, such as for the acquisition or expansion of production facilities. Also, by investing in marketable securities, they have the potential to generate returns.
The return depends on the type of investment. Bonds usually offer coupons and provide capital gains. Meanwhile, besides capital gains, some shares also offer dividends. Government bonds are generally more liquid and lower risk than corporate bonds. However, corporate bonds are also relatively safer than stocks.
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