What are Marketable Securities?

Marketable securities are like reading a book while waiting for the next bus…

When you’re waiting at the bus stop, you’re just sitting idle. You’re making yourself available so that you can act when the time comes. However, you could get a return on your waiting time by reading a book and learning something like a new vocabulary word or a cooking recipe. Likewise, investing in marketable securities allows a company to gain a return on otherwise idle funds instead of just sitting on a pile of cash.

Marketable securities are financial instruments that one can buy or sell for cash (liquidate) within a year.

Companies need cash on hand to deal with a wide variety of expenses. The high liquidity of marketable securities enables a company to maintain a portion of necessary reserves in short-term investments that provide a financial return.

Examples of marketable securities are:

• Common stock: An equity security that gives you a unit of ownership in a company and voting rights.
• Preferred stock: Similar to common stock, preferred stock gives you preferential treatment like a priority on dividend payments and priority in payment if a company were to go bankrupt.
• Certificates of deposit (CDs): A deposit in a financial institution (like a bank or credit union) that is held for a period and grants you recurring monthly payments or a lump-sum payment upon the CD’s maturity. If you withdraw the deposit during the holding period, you’re typically subject to a penalty and lose interest payments.
• Corporate bonds: To raise funds, a company issues these short-term IOUs that grant the holder periodic payments and the eventual repayment of the principal.
• Treasury bills: The U.S. Treasury sells these short-term debt securities, which are guaranteed by the U.S. government. Treasury bills are also known as T-bills.
• Municipal bonds: A state or local government can also issue short-term bonds.
• Commercial paper: Another type of short-term debt security that a company issues in exchange for funding. A commercial paper is unsecured because no collateral backs it.

One of the principal characteristics of marketable securities is that they are financial instruments that provide you the potential for financial return. For example, a preferred stock, in addition to dividends, has the potential (all investing involves risk) of increasing in market value. Another example is a Treasury bill (T-bill), which sells at a price lower than its face value and grants you the full face value upon maturity of the T-bill.

Another characteristic of marketable securities is that they trade with relative ease on established markets. Marketable securities are financial instruments that actively trade on equity markets (e.g., the New York Stock Exchange, Nasdaq) and bond markets (e.g., money market, U.S. Treasury). The active trading of marketable securities allows buyers and sellers to have clear expectations of the market value range of these financial items.

Another reason that marketable securities trade with ease is that many marketable securities trade on publicly-traded exchanges that are subject to government regulation. For instance, the Securities and Exchange Commission oversees and enforces the fair trading of several security markets for marketable securities in the United States.

Marketable securities generally fall under two categories:

Equity marketable securities: Equity marketable securities are investments that grant you ownership rights. For example, a common stock gives you a unit of ownership in a company.

• One example is common stock (a share representing a unit of ownership in a company).
• Another example is preferred stock (a type of share that has additional perks than a common stock like being first in line for payment when the company issues a dividend payment to stockholders).
• Equity marketable securities may provide the opportunity to make a profit (referred to as capital gains) by selling them at a higher price than you originally paid for the securities or receiving a stream of coupon payments.
• Some equity marketable securities provide a recurring payment like the dividend of preferred stock.

Debt marketable securities: Debt marketable securities are funds that you lend to another party, where that party must repay under certain terms.

• Examples: certificate of deposit, corporate bond, municipal bond.
• Some debt marketable securities make recurring payments (referred to as fixed income securities).
• Other debt marketable securities only offer a premium payment on top of your original payment upon maturity. Typically, these debt marketable securities are very short-term.

Some issuers of marketable securities may create hybrid marketable securities that combine elements from equity and debt marketable securities. For example, a convertible bond is a debt security that includes a clause allowing you to convert the bond into a number of common shares under specific conditions. Another example of hybrid marketable securities is an equity warrant that grants you the right to buy a number of shares at a set price during a limited period.

You may find marketable securities on a balance sheet in two places on a balance sheet.

• Marketable securities with a maturity of 90 days or less may be included in the “cash equivalents” account. Typically, a company discloses this action as a footnote on the balance sheet.
• Marketable securities with a maturity or holding period of under a year appear as marketable securities.
• A company can also include here marketable securities with a holding period of over a year but that the company plans to liquidate within a year. Typically, a company discloses this action as a footnote on the balance sheet.

• Marketable securities in the non-current assets section have a maturity greater than a year. The company intends to keep these financial instruments for more than a year.

Maturity and holding are the two factors that determine whether or not marketable securities are current assets.

• Maturity < one year: Always a current asset.
• Maturity > one year: Only if the holding period of the marketable security is under a year.

• Holding period < one year: Always a current asset.
• Holding period > one year: Not a current asset, the marketable security is a non-current or long-term asset.

The difference between marketable securities and non-marketable securities is that marketable securities can be actively traded in secondary markets that are open to all types of investors. Examples of secondary markets are the New York Stock Exchange and Nasdaq.

Unlike marketable securities, non-marketable securities don’t trade on secondary markets and are non-liquid assets (they can’t be converted into cash easily). Non-marketable securities have a limited window for trading.

Examples of non-marketable securities are Government Account Series (GAS) securities — unique debt-based funding mechanisms that the U.S. government uses to cover budget deficits. The government has several trust funds creating returns that aren’t needed right away (think of trust funds for Social Security or military retirement pensions), so the government creates GAS securities with that return to cover a deficit.

A GAS is a debt non-marketable security that doesn’t trade on secondary markets because the government has earmarked the GAS funds to eventually go back to the trust fund that created the excess return.

Other examples of non-marketable securities are treasury inflation protected securities (TIPS) — debt non-marketable securities issued by the U.S. government and whose value is linked to the rate of inflation as measured by the consumer price index. You can buy TIPS in auctions only at certain times of the year.

You calculate marketable securities by adding the totals from three places in a company’s balance sheet:

Marketable securities included in “cash equivalents” in the current assets section + Marketable securities listed in the current assets section + Marketable securities listed in the non-current assets (long-term assets) section = Marketable securities

(Note: You can find marketable securities recorded under “cash equivalents” by reading the balance sheet’s footnote disclosing this action.)