What are marketable securities?
Marketable securities are characterized by their high liquidity, allowing for swift conversion into cash at a fair price. This liquidity stems from their relatively short maturities, typically less than one year. Additionally, the prices of marketable securities are not significantly impacted by the rates at which they are bought or sold, further contributing to their ease of liquidity.
Marketable Securities Explained
Businesses maintain cash reserves to be prepared for prompt action in various scenarios, such as seizing acquisition opportunities or making contingent payments. However, if a business keeps a substantial amount of cash idly in its accounts, it misses out on potential interest income. To overcome this, businesses invest a portion of their liquid cash into short-term, easily convertible securities.
By investing in marketable securities, businesses ensure that their cash is not stagnant and can generate returns. These securities can be swiftly liquidated if the need for cash arises unexpectedly. Marketable securities encompass unrestricted financial instruments that can be bought or sold on public stock or bond exchanges. They can be classified as either marketable equity securities or marketable debt securities.
An essential characteristic of marketable securities is a robust secondary market, facilitating efficient buying and selling transactions. The presence of a secondary market also provides investors with more accurate pricing information.
Due to their high liquidity, marketable securities typically offer low potential returns. However, their liquid nature contributes to their reputation as relatively safe investments.
Features of Marketable Securities
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Highly Liquid
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Easily Transferable
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Marketability
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Lower Return