A marketable security is a financial instrument that can easily be converted into cash. Companies hold these securities as they provide a profit opportunity and can be exchanged for cash if the need arises.
What does marketable securities mean?
Companies need to maintain a cash buffer at all times. This is because they may require the liquidity to take advantage of a market opportunity. For example, a raw material that the company uses in its production process may be available at rock-bottom rates. If a firm has the cash, it could buy this material and lower its overall costs thereby increasing profits.
There are also other reasons to maintain an adequate cash balance. A large customer may delay payments or the demand for the company’s products may see a slump. In these situations, a company may need to rely on its cash reserves to meet its day-to-day requirements.
Instead of simply holding cash, many firms opt to deploy a part of their liquid funds in marketable securities. By purchasing stocks or bonds or other marketable securities that can easily be sold on an exchange, a firm gets the opportunity to earn a profit while having the option of converting the investment into cash at short notice.
Example of marketable securities
Several types of financial instruments can be classified as marketable securities:
⇨ Stocks: An investment in the shares of another company will qualify as a marketable security only if certain conditions are met. It must be regularly traded on the stock exchange, and it should be possible to sell the stock whenever the need arises. An investment in the shares of a subsidiary company will not be classified as a marketable security.
⇨ Bonds: Both corporate bonds and government bonds can fall into the category of marketable securities. However, these investments must be highly liquid, and it should be possible to sell them easily and quickly on a bond exchange.
Other examples of marketable securities are Banker’s Acceptances, Treasury Bills, Certificates of Deposit, and Commercial Paper.
A marketable security is a short-term financial instrument that is held by a company. This type of asset is also referred to as “near money” or a “near-cash asset.”